Crypto market rates refer to the rates at which cryptocurrencies are bought and sold. A quick Google search on "crypto market rates" will draw up daily rates at which different coins are being sold. This information is essential for anyone who intends to trade or invest in any coin or token.
Coming into the crypto ecosphere could be unsettling with all the statistics thrown at you. You will hear terms like market cap, price regulations, etc. While these terms sound confusing, they explain the dynamics of buying and selling digital assets.
This article will guide the crypto beginner on how market rates are determined, the influence of market cap on prices, and general points to keep in mind while trading or investing.
What determines market rates?
The cryptocurrency market has thousands of assets, coins, and tokens available for buying and selling. Due to the differences between these coins and the difference between crypto and other commodities like stocks, prices are determined by varying factors.
Primarily, market prices are determined by demand and supply laws. However, there are other forces at play that also influence how much a coin is sold or bought per hour.
1. The law of demand and supply
Economics teaches us that when a commodity is in high demand, and the supply is low, the price of the commodity will increase and vice versa. This is the most significant determining factor in the prices of crypto assets.
Various factors can affect demand and supply, but it depends on how many people want a coin and how many are willing to sell.
2. Cost of production or mining
Since the oldest cryptocurrency is mined and not produced like goods, a finite number is available for trade. Most coins and tokens are limited. Therefore, supply is limited.
The cost of setting up or mining affects the price at which a coin sells per time. Bitcoin has become increasingly expensive to mine, and asides from other contributing factors, buy and sell rates have increased since its creation.
3. Awareness and acceptance
It goes without saying that on the market front, a commodity will grow in value if it is known by consumers/users and is accepted as opposed to its competitors.
If a coin struggles to be accepted, its demand will be low compared to others doing well.
Take Bitcoin, for example. When it was launched, it was known by a few and accepted by even fewer. Over the years, its value has increased because it has become more popular and accepted. Its market rates are now different from what it was two years ago.
4. Competing coins
The most popular coins are Bitcoin (BTC) and Ethereum (ETH). Before Ethereum grew in popularity, Bitcoin dominated the market. Now that more investors are taking an interest in not just Ethereum but other crypto assets, the competition is tougher.
Although competition may not directly affect the demand for a particular coin, it increases demand for those other coins. Resources for trade are limited, and investors must choose the currency in which to invest.
The availability of options threatens the demand-supply dynamic of a coin like Bitcoin. If investors deem other assets to be of comparable or equal value, demand for Bitcoin will reduce, and so will its price.
Can market rates be predicted?
The simple answer is yes; market analysts can predict market rates and trends. However, not all predictions materialize because of the uncontrollable factors at play.
A thorough analysis of the history of a cryptocurrency, its growth, investors, and market cap can assist a financial expert in making market rate predictions. Essentially, three types of analysis are used to make predictions, and they are
● Fundamental analysis
● Technical analysis
● Quantitative analysis
But if the COVID-19 pandemic taught the world anything, it is that there will always be the factor of unforeseen circumstances to consider in any projection.
What is fundamental analysis?
As explained in this article on the Obiex blog, fundamental analysis looks at the market and how it is affected by factors like global economics, political conditions, and others.
What is technical analysis?
This analysis examines a currency's history regarding price movements and patterns by studying the charts.
What is quantitative analysis?
This part of the analysis studies the numbers and combines the findings from the fundamental and technical analyses.
With all of this information, tentative market prices and trends could be predicted. However, uncontrollable events are also always taken into account.
Market Cap and How it Influences Crypto Market Rates
Market capitalization, otherwise referred to as market cap, is the overall value of a company's shares in dollars. In crypto, market cap is the total value of the cryptocurrency owned by holders. In other words, it is the number of mined coins in dollars.
The formula for calculating market cap is the number of available shares or coins multiplied by the price of a single currency per time.
Let us use Bitcoin as an example. If one bitcoin is selling for $2, and there are 100 mined coins already in circulation, the bitcoin market cap would be:
100 x 2($) = $200
Now, why is market cap important, and how does it affect the prices at which coins are bought and sold?
How Market Cap Affects Market Rates
Market cap is a metric that shows a coin’s stability over time. It shows the potential an asset has to grow over time. Analysts can use the information to predict buying and selling rates.
Market cap affects market rates in the following way.
It influences the demand/supply curve of an asset.
It’s now established that demand greatly influences how much cryptocurrencies are sold on the market. But aside from the factors already mentioned, market cap influences demand.
When the analysis is done, and it is seen that the market cap for a particular currency has been on an upward move over time, that currency will be seen as one with huge potential. This could lead to an increase in demand, making it more expensive.
In the same vein, if the market cap of a coin drops as the years go by, it’s usually a sign that the coin may not do well and could steadily decline in value. Of course, the natural response to this information will be a decrease in demand and an increase in supply which causes its price to fall in the market.
Key points to note about crypto market rates
● Market capitalization (market cap) is the total value of a cryptocurrency on the market. It is calculated thus: number of coins in circulation x price of each coin.
● To a large extent, buying and selling rates are determined by demand and supply. But other factors affect demand and supply.
● Market cap is one of the factors that can affect the demand and supply of assets.
● The more popular a coin becomes, the less volatile it becomes. This is because the risk involved is significantly reduced.
To know how prices are set for the buying and selling of crypto, you must understand the different factors that give value to a currency. The most important factor is demand and supply. Every other thing plays around it. The key is to always do your due diligence before buying or even selling.
Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.