Introduction
About a decade has passed since the birth of cryptocurrencies, and during this time we have witnessed many ups and downs in this field. Different countries, governments, and peoples have each taken a different approach to this area, causing the cryptocurrency market to experience sharp price fluctuations. The news of the hacking of a major exchange, the news of the illegalization of crypto transactions in a country, the approach of a famous billionaire, and so on, cause the price charts to turn green or red.
According to many economists, the crypto market is not yet mature enough and has a lot to experience compared to other major financial markets. But the growth rate of this field is so high that it has attracted the attention of many small and large investors. In this article, we intend to share with you the views of Mr. Mohammad Hosseini, a trader, and financial market analyst, on factors affecting the price of cryptocurrencies.
How is the true value of a cryptocurrency determined?
According to Mr. Mohammad Hosseini, the first point about the true value of a cryptocurrency, regardless of the news or the emotional atmosphere about it, is that the purpose of the project is clear and its fundamental factors are moving in that direction. These are the basic principles of a project that can be obtained by studying the white paper. Next, factors such as the consensus algorithm, block formation time, and scalability should be considered. A first-generation blockchain project like Bitcoin indeed has about half the market volume, but we have to admit that second-generation technologies (like Ethereum) and third-generation (like Cardano) offer more capabilities, and sooner or later, They gain more share in this market.
This does not mean that Bitcoin will disappear, because many large companies have invested in it, and whether we like it or not, the world is in the hands of the rich. We are only trying to better understand the criteria for identifying good projects and factors affecting the price of cryptocurrencies.
Apart from these factors, there are more technical factors such as the number of nodes, the amount of demand for that currency, the level of acceptance, the number of coins, the cost of mining or producing new coins, and most importantly, the community that developed that currency. The more developments work on a project, the more and more extensive its future plans are, and the more likely it is that the project will grow.
So far we have learned how to calculate the true value of a project. In the following, we will ask Mr. Hosseini for his opinion on some important factors affecting the price of cryptocurrencies.
What are the factors affecting the price of cryptocurrencies?
When we want to talk about the factors that affect the price of cryptocurrencies, we must know that there are many factors in this regard, many of which are the fundamental points of projects. On the other hand, in one project, large investors and whales may play a major role, and in another project, its applicability may have the greatest impact on the growth and price of that cryptocurrency. As a result, one formula cannot be used to evaluate all projects, but we can divide these impact factors into two parts:
Community of users, miners (or validators), and developers
If a project has an active community, that is, users are willing to use the services and facilities of the network, then the activities of miners and validators will also be cost-effective. This means that developers have been able to create a space where servers and users can interact well. Such a network is likely to grow and investing in it will be profitable in the long term, provided that other basic factors are also considered.
Application, scarcity, and proven price
The usability of a currency is directly related to the purpose of the project. Consider, for example, projects such as VeChain that focus on corporate supply chain issues, or Polkadot and Cosmos that focus on blockchain connections. These are very practical areas and the probability of price growth for such projects is very high.
Another important point is the number of coins defined in a project. Contrary to many people’s beliefs, low coins are not the reason for price growth and high coins are not the reason for falling prices; but we should note that there is an approximate ratio between the number of coins and the price of each unit. Also, some projects have a token burning program, which is one of the policies to reduce the number and scarcity of coins and thus increase prices. But there are also projects like Ethereum that, although they do not burn tokens and the total number of coins is limited, their value is constantly increasing due to the many uses and services they provide.
Proven prices refer to currencies that have been around for some time and the crypto community has come to a relative understanding of them. The price chart of such currencies shows that in the long term, the price is not less than a certain limit and users are willing to buy and sell such currencies at higher prices.
How does a network attack, hack, or security bug affect the price?
A project, no matter how practical and standard, is enough to experience a security bug or a successful attack on the network to change everything in less than a few hours. These issues can occur for both blockchains and exchanges, which creates a negative emotional atmosphere and is usually accompanied by a sharp price dump and large red candlesticks in the price chart.
Many years ago, Ethereum experienced such an unfortunate event that led to the separation of the current Ethereum from Ethereum Classic. Recently, the noisy Avalanche network was also growing so fast that a security bug in the network changed the course of everything at once. Of course, such networks have a strong development team that improves the situation with continuous effort and work overtime.
What is the impact of news and support of famous people and companies on a project?
We know that media and social networks have a lot of power to control public opinion. This is also clearly seen in the crypto market. We can refer to Dogecoin cryptocurrency. The project was said to be a joke; but we have seen that if famous and powerful people like Elon Mask want, they can create a positive atmosphere about a project with the help of social networks and turn a joke into a serious topic worth billions of dollars.
News such as Central bank statements of different countries on Bitcoin and other cryptocurrencies, SEC chairman speeches on cryptocurrencies, news of a currency being listed or delisted in an exchange, fraud or hacking of an exchange, the addition of a cryptocurrency to corporate investment funds like Grayscale, Microstrategy, etc. have a huge impact on the price of cryptocurrencies in a matter of hours.
Closing thoughts
Crypto projects have attracted the attention of many investors and the knowledge of market analysis has become more and more a basic requirement for successful investment. Mr. Mohammad Hosseini, as an analyst, trader, and investor in financial markets, especially the cryptocurrency market, believes that before entering this market, we must obtain information on factors affecting the price of cryptocurrencies.
The first point is the ability to recognize the true value of a project, which can be evaluated by studying the white paper to understand the purpose and direction of the project. Next, we need to get information about the community of users, miners (or validators), and developers of that network, and learn about the application, the number of coins, and the processes that take place in it.
Apart from the technical points, we should always be aware of the possibility of security attacks, hacks, and bugs in the system, and be aware of the news as well as the atmosphere on social networks about the projects.
Summary: In order to increase our knowledge of the factors affecting the price of cryptocurrencies, we must first know how to determine the true value of a cryptocurrency. In the following and according to what Mr. Mohammad Hosseini says, we must pay attention to the community of users and developers, application, scarcity of coins, etc., and finally, we must always follow the news and social networks of the projects.