The price of Bitcoin, and nearly every other cryptocurrency, has been fluctuating like crazy lately. It’s worth $37,000 one day, and $52,000 the next. According to SoFi Invest brokerage, “BTC is down approximately 23% from 2021 high above $60,000.” It’s hard to predict what will happen to these digital currencies because so many variables are at play, but I’ll try to make sense of it all in this post.
Understanding the Value of a Cryptocurrency
While I won’t be diving into technical details of how crypto payments work (better elucidated in Satoshi Nakamoto’s white paper), understand that they are not issued by banks or governments but instead exist on an entirely different network called blockchain. Blockchain is a distributed database, meaning all of its nodes must verify any transaction before you can complete it. Once recorded, users cannot alter information on blockchain without altering all subsequent blocks—which requires the collaboration of all users.
Why Do Prices Rise or Fall?
Most people aren’t aware of how quickly cryptocurrency can rise in value. A $10 investment in 2010 could have turned into a $10 million jackpot in 2017, according to the Bitcoin price history chart provided by SoFi Invest. But don’t take it from us. Look at what happened to bitcoin: One year after its invention, one bitcoin would cost you just a penny. Eight years later, that same coin would be worth thousands of dollars.
Cryptocurrency Supply and Demand
As with any investment, you should consider cryptocurrency’s supply and demand. The more people who want to own a currency and can’t get their hands on it (supply), will drive up prices. If there are more bitcoins available for purchase than those looking to buy them (demand), then its price will drop. Cryptocurrency is less regulated than stocks or bonds, so some coins may be inherently limited in availability—that could drive up their price as well.
If a currency is in higher demand but has a fixed supply, its price will rise as it becomes more scarce. On the other hand, its price will drop if there are too many Bitcoins available for purchase and not enough people interested in buying them (that is, low demand). Demand drives prices up; supply brings them down.
Finding Value in Cryptocurrency
When looking at cryptocurrency’s price history, you’ll notice a pattern of spikes and dips. What causes these fluctuations? And what can you do to find value in cryptocurrency markets? To answer those questions, it’s helpful to look at how traditional financial markets work—and how cryptocurrencies are different from traditional investments. So let’s start with something familiar: buying stocks. If you want to purchase stock in ABC Company, there is no way for you to finalize your transaction until trading has closed on that company. So if you try to buy stock before 9:30 AM EST (when major U.S. exchanges open), your transaction will fail because no one will sell you shares yet.
Investing in cryptocurrency can be a high-risk, high-reward situation. If you are curious to invest, it’s important to do your research and learn as much as possible about these assets before making a purchase.