What is a market?
In fact, the reason behind everything lies in the relationships between people. Society has transitioned from barter to monetary policy thousands of years ago, but despite this, the principles of exchange remain the same as in the time of cave dwellers.
Today, each of us buys and sells something several times a day - our time in exchange for a salary or a business lunch at a cafe, etc. This mechanism, in which buyers and sellers interact, is called the market. And all relationships in the world are regulated by the market itself.
The market works on the principle of a self-regulating mechanism. If the cost of supply of something exceeds the demand, surpluses of goods accumulate in the market, and sellers start reducing the price for that product. And if the cost of supply is lower than the price buyers can offer, a shortage of goods appears in the market, and sellers, in turn, increase the price. Thus, the market constantly strives to reach equilibrium where the interests of both buyers and sellers coincide.
What about money?
In fact, market mechanisms work for everything, not just goods, but also services or information. Money, in a general sense, is a commodity that can be bought with the currency of another country at the corresponding exchange rate.
Money was invented as a universal commodity that made it more convenient to exchange one product for another.
Currencies of different countries are valued differently. Some are cheaper, others are more expensive. This is primarily due to the fact that different currencies can purchase goods and services produced by the corresponding country, but the quantity and quality of these products will vary for different currencies.
Moreover, all countries, in one way or another, are involved in foreign economic activity, so they have a need to exchange currencies with each other. The conversion of one currency into another is based on the exchange rate determined on the international financial exchange - Forex (not to be confused with forex brokers, which are essentially just fancy bookmakers). The exchange rate is also established based on the supply and demand ratio in a specific currency pair, taking into account the exchange rates of all other countries' currencies.
Demand and supply for currencies are influenced by various political and economic factors. The most significant factor is the actions of central banks, their monetary and credit policies, and currency interventions (buying and selling different currencies to maintain their prices in a favorable range). Currency exchange rates fluctuate and are in constant motion, sensitively reacting to any changes in economic conditions.
Is cryptocurrency also money?
We have already established that money is a commodity that is convenient to use for calculations in the process of exchanging values (goods, services, information). In this sense, cryptocurrencies do not differ in their functions from a stack of banknotes - their global task is to be a convenient intermediary in the relationships between different people and businesses.
Cryptocurrencies are commodities, so their prices depend on supply and demand.
This is the basic principle of the global economy. If there is a large quantity of tokens on the market with low demand from traders and users, their price will decrease. And if the supply of a cryptocurrency is limited and demand is growing, its price in the market will increase.
The most important factor determining the price of any asset, including cryptocurrencies, is supply and demand. The price always rises with increasing demand and falls when investors lose interest.
Interesting fact: The Bitcoin blockchain is originally programmed in such a way that the total number of tokens ever issued will never exceed 21 million units.
What factors influence cryptocurrencies?
All tokens in the cryptocurrency world are subject to the influence of various factors. Although fundamental factors have little significance in determining prices, they indirectly affect demand. So, what are these factors?
- greed and fear of investors;
- mining costs;
- hashrate and other on-chain parameters;
- competition for investor attention;
- legislative acceptance;
- ease of buying and selling process;
- manipulation by large holders;
- geopolitics and international news.
For example, although consumer price indices, global GDP, and statements from central bank leaders do not directly impact cryptocurrency prices, they influence the sentiments of investors and traders. Decisions to buy and sell cryptocurrencies are made considering economic and political news worldwide.
Why does the price change so dramatically?
The cryptocurrency market is still relatively young. The majority of people have not even heard of "cryptocurrency," let alone delved into its intricacies and invested in the market. Young markets exhibit certain qualities that come with high volatility.
For comparison, the total value of all world currencies exceeds $90 trillion, while the total market capitalization of cryptocurrencies is currently only around $1 trillion.
Cryptocurrencies as a phenomenon emerged less than 14 years ago, and the futures market, in particular, gained significant development only 3-4 years ago. However, as it matures, the cryptocurrency market will become increasingly similar to traditional finance. And thanks to the abundance of derivative instruments, token prices will stabilize in the short term and long-term trends will be determined.