What Cryptocurrency Exchange Rates Depend On, Influencing Factors
Cryptocurrencies in recent years have won the attention of many investors, thanks to their features and potential that they promises and already have shown. But as a new financial instrument, they are not yet well known to the broad masses of people, and many people are worried about investing in them. However, despite this, thousands of investors have already been able to earn on cryptocurrency. In order to reduce the risks of investing in cryptocurrencies, it is necessary to understand what cryptocurrency exchange rates depend on.
Cryptocurrency, like any other currency, has its value relative to other currencies and in particular the US dollar, which is reflected in its exchange rate. Its value also depends on demand, as is the price of many other investment instruments and securities. However, the features of the cryptocurrency exchange rates, although they have much in common with the formation of the rates of ordinary currencies, they are still significantly different.
Thus, the rate of fiat currencies is greatly influenced by the rate of inflation in the state that issues it, while most of cryptocurrencies are not tied to any states and centralized regulators. Due to the peculiarities of the production and circulation of cryptocurrencies, as well as a predetermined maximum possible number of units that can be created, they are practically deprived of such a thing as inflation in principle.
Cryptocurrency decentralization does not allow any centralized authorities to influence it by issuing additional units of currency, by changing interest rates or other regulatory measures. Other ways of influence by states, banks and corporations at this stage of their development are also excluded. Therefore, for example, the state of the balance of payments of the state, sanctions or monetary policy can not have a direct impact on the rate of cryptocurrency.
Despite their lack of dependence on banks and governments that could manipulate the rate of cryptocurrencies, they are highly volatile, i.e. have increased propensity for cost fluctuations. Such independence of cryptocurrency can also be a high risk factor. So what affects the features of the course cryptocurrency?
Virtual currency is not secured by any guarantees or tangible assets, but only by market demand for it. Naturally, when the demand for a specific cryptocurrency falls, so does its price. The demand, in turn, is influenced by a large number of traders on the cryptocurrency exchange, who do not invest as much as bet, which makes cryptocurrency fluctuations grow.
Some large players and miners’ pools sometimes try to influence the price of cryptocurrency, but the larger the capitalization of a particular cryptocurrency, the less opportunities they have to have a significant impact on the movement of its price up or down. In this case, the share of small and medium-sized investors on the exchange becomes larger, and the supply and demand is more chaotic.
The demand for a specific cryptocurrency begins to depend more on the general mood of investors and traders, as well as the assessment of its prospects. On the other hand, the more such influence of the masses of small traders becomes, the more effective the technical analysis of the cryptocurrencies behavior and the analysis of past events.
On the other hand, as in the case of conventional fiat currencies and other securities, economic and political news, legislative changes and statements by officials in different countries, especially those with significant weight in the global economy, have a great influence on general market sentiment. The market quickly responds to such news, which immediately affects the fluctuations in cryptocurrency prices. Economic news can often influence not long, but quite strongly.
Technical innovations and updates in software related to cryptocurrencies and Blockchain technology have a significant impact on the features of cryptocurrency exchange rates. Developments in this area are often the cause of the developing of new types of cryptocurrencies or branches (forks) of existing ones. Thus attracting additional, often quite large investments in this area, new developments reduce the share of every single cryptocurrency in the total capitalization of their market.
High tendency to fluctuations in the rate negatively affects the ability to use cryptocurrency as a massive universal means of circulation. At the same time, the volatility of cryptocurrency is the key to its investment attractiveness, since a stable rate has much less opportunities to earn both for investors and for traders.
In addition, if you do not take into account the difficulties in short-term investments, the main of the top 10 cryptocurrencies, especially Bitcoin, which is the leader in capitalization and value, in the long run show a significant increase in their value, making them an attractive tool for investment.
Many experts in the field of finance and fund trading consider cryptocurrencies too unpredictable. These assets are quite difficult to analyze by the history and their charts. Of course, these are far the only variables affecting the cryptocurrency exchange rates. In this regard, the main recommendation for those who are going to make money on investments in cryptocurrency will be the that is worth understanding how they work, as well as the process of trading and analyzing the movement of their prices and influencing factors.
In addition, you need to constantly keep abreast of the cryptocurrency market, news, new projects and technical innovations, as well as everything that is happening around this topic. This will help you to respond in time to any changes that occur, in order to reduce the risks of losing your investments, and learn how to benefit from the features of the cryptocurrency exchange rates.
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