What factors affect the cryptocurrency exchange rate?

The value of cryptocurrencies is formed from different dynamic indicators that can affect the quotes of digital assets both individually and in a complex way.

The degree of influence can also vary: while some factors affect individual assets, others can affect entire ecosystems. However, knowledge of these factors can help anticipate possible situations in the crypto market.

1. Supply and demand balance

This indicator reflects how interesting an asset is to investors and how supply matches demand.

For example, the Bitcoin protocol has an inherently deflationary mechanism that limits the cryptocurrency's maximum supply to 21 million BTC. Up to this point, miners mined the cryptocurrency, but the rate of issuance regularly drops due to halving and the ever-increasing complexity of the Bitcoin network.

Thus, new units of bitcoin come into circulation at a very slow pace, which does not create significant pressure on the cryptocurrency's price. Analysts estimate that Bitcoin's current annual inflation rate is only ~1.8%, which means that as demand increases, the price of BTC will rise.

In addition, it is worth considering other factors, such as the amount of cryptocurrency on cold wallets and the number of bitcoins that remain immovable for several years — all of which reduce the number of bitcoins in circulation, i.e. supply.

For example, according to Chainalysis and Fortune analytics services, in 2024, about 1.8 million bitcoins were lost, 8.5% of the BTC cap.

2. Market sentiment

Emotions are one of the main driving factors in the market. For example, the sale of a large amount of cryptocurrency by whales can cause panic on the part of investors and trigger a wave of sell-offs.

For example, amid the massive outflow of funds from the Bitcoin-ETF in February 2025, the price of the first cryptocurrency fell by more than 6% in less than a week, dropping below $90,000 and reaching a local low.

Another prime example is the U.S. presidential election in 2024. Before the votes were counted, it was completely unclear which candidate would win, so investors showed restraint.

However, after it became clear that Donald Trump would win, the rate of digital assets began to grow rapidly, and the value of the first cryptocurrency updated the historical maximum (ATH) the next month, rising above $100,000 for the first time.

Another good example is the recent hack of a major crypto exchange, ByBit. During the hack, the attackers managed to steal about $1.5 billion in Ethereum (ETH) cryptocurrency — one of the largest incidents in the crypto market's history. Almost immediately after news of the hack, the price of ETH fell by 5%.

3. Liquidity

Liquidity is one of the most important market indicators. It is closely related to volatility — that is, the level of price fluctuations over a certain period of time.

Liquidity reflects how available an asset is on the market and whether buying or selling it for a significant amount will significantly affect its value. Bitcoin can be considered a liquid asset because it can be converted into cash quickly and without large financial outlays. Other examples of liquid assets include shares of major companies, accounts receivable, and sought-after real estate.

However, not all altcoins can be considered liquid in the cryptocurrency market. For example, if you sell bitcoins for $1 million, such a transaction is unlikely to significantly affect the digital asset's value. But if you sell the same amount of some poorly capitalized meme token, such as BOME or DOGS, their value can instantly drop by at least a few percent and cause a wave of sales.

4. Macroeconomic factors

Economic indicators, such as the level of the Fed key rate and the dynamics of stock indices, also influence the cryptocurrency market.

For example, analysts noted the correlation between the bitcoin rate and the large S&P 500 index in 2018. In October 2024, a historic high was recorded when the correlation between BTC and S&P 500 quotes reached a record 0.5%. This means that the quotes of these assets practically repeated each other's movements.

The Federal Reserve System's key rate also has a significant impact. When it grows, the yield on deposits also increases. This leads to investors switching to more stable financial instruments, avoiding more significant risks.

When the key rate falls and the yields on traditional savings instruments fall, investors become willing to take more risks. They are more willing to invest in riskier assets, including stocks and cryptocurrencies.

For example, on September 18, 2024, the U.S. Federal Reserve reduced the key rate by 50 points — to 4.75-5%. Just one month after the data was released, the Bitcoin exchange rate rose more than 45% from $62,900 to $92,300, renewing its all-time high.

5. Unforeseen factors

Unfortunately, not all events can be predicted — which is why professional investors recommend diversifying your portfolio and hedging your risk by providing a variety of assets.

Incidents can affect an individual project or the entire ecosystem, depending on the scale of the incident. A prime example is the collapse of the infamous Terra blockchain platform in May 2022.

At the time, the DeFi protocol Anchor was particularly popular, offering deposits in UST stablecoins with yields of up to 20% per annum. However, investors began withdrawing funds from the Anchor protocol en masse after the protocol team lowered the interest rate. This resulted in the loss of UST's peg (depeg) to the U.S. dollar exchange rate, triggering the so-called "death spiral".

Right before the crash, the Terra platform was one of the industry's ten most significant crypto projects, and its market capitalization reached $31 billion. However, two weeks after the incident, Terra's market capitalization collapsed more than 35 times to $882 million.

However, it was not only Terra investors who suffered — the platform's collapse also affected other ecosystems, such as Cosmos. For example, UST was actively used in the liquidity pools of Osmosis, the leading decentralized exchange in the Cosmos ecosystem, along with its native token, OSMO. As a result, the de-pegging of UST also led to the collapse of the OSMO token.

In conclusion, it should be noted that another factor can offset one factor, a stronger one — both positive and negative. Therefore, when investing in cryptocurrencies, one should always consider the risks.