What Affects the Value of Cryptocurrency?
November 13, 2020
Cryptocurrency has long been a volatile market, with rises and falls of 40% or more in a matter of days not uncommon. But, with volatility comes opportunity and some savvy investors have capitalised on massive gains over the years.
The value of cryptocurrencies like Bitcoin have recently risen to their highest price in years, but what drives these price changes?
What is Cryptocurrency?
A cryptocurrency is a digital or virtual currency which is used as a medium of exchange. It is similar to real-world currency, or what is known as ‘fiat’ currency (currency where the value is backed by the government that issued it), but for the fact it does not have any physical embodiment and uses cryptography, which makes it nearly impossible to counterfeit or double-spend.
According to cryptocurrency researcher Jan Lansky, a cryptocurrency is a system that meets six conditions:
- The system does not require a central authority, its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
The first blockchain-based cryptocurrency was Bitcoin, which remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications.
Investing in Crypto
Investing and trading in cryptocurrencies is different to investing in other assets. There are a couple of things every aspiring crypto investor needs before investing:
A secure cryptocurrency wallet to store cryptocurrencies.
The first thing you will need to start investing is a wallet to store cryptocurrency. When it comes to choosing a crypto wallet, you have two options; ‘software’ and ‘hardware’ wallets.
Software wallets are mobile applications that connect with your traditional bank account. These wallets allow for quick and easy access to bitcoin, but they put your money in the hands of a third-party company. Hardware wallets are a little more old-school but are generally considered to be more secure because they are kept offline. These wallets store a user’s private key on a physical hardware device similar to a flash drive, which prevents hackers from accessing a user’s private key through an Internet connection.
A cryptocurrency exchange or a broker where you can buy and sell cryptocurrencies.
Crypto exchanges are online marketplaces where you can trade cryptocurrency for fiat currencies, say BTC for USD. Just like when you go to make a retail purchase online, you have a number of options. Even when two exchanges trade the same cryptocurrencies, they usually offer slightly different services. Exchanges can vary in reputation, reliability, security, processing fees, exchange rates, and cryptocurrencies available for trading.
Once you have a digital wallet, an account at a cryptocurrency exchange and a method of payment in place, you’re ready to begin investing and trading in cryptocurrency. But what drives the massive price changes we regularly see in crypto?
When you open a traditional bank account, the bank takes record of your KYC data. However, it is not mandatory to use a KYC regulated cryptocurrency exchange to trade. A number of exchanges legally operate in jurisdictions that do not mandate KYC, placing them in a grey area in terms of legal obligations.
As new regulations are implemented, prices tend to react quickly; when Japan announced that it was legalising bitcoin in April 2017, its price rose nearly 3% in a day.
One thing you can count on in the world of crypto compliance and regulation is how unpredictable it is. Anti-money laundering regulations are changing all the time and businesses dealing in crypto assets must be prepared to move swiftly, adopt new standards, and protect their business from regulatory scrutiny.
Current affairs that seemingly have nothing to do with cryptocurrency can have an effect on the share price. Cryptocurrency is seen as an alternative to fiat currency, so when investors lose their confidence in a fiat currency because of economic or political events, they can turn to bitcoin or its rivals, pushing up the price.
That said, recent announcements such as the presidential election result and rumblings of a potential Covid-19 vaccine have had positive effects on both crypto and fiat currencies. When it was announced that Joe Biden had won the race to become the next President of the USA and that a potential vaccine to Coronavirus could be made available next year, financial markets around the world rallied with global shares reaching record highs. The same can be said for crypto value as Bitcoin soared to its highest level since January 2018.
We explored recently how PayPal allowing customers to hold cryptocurrencies in their online wallets and use them to shop at the 26 million merchants on the network is helping change perceptions of cryptocurrency. This could help the inversely proportional values of crypto and fiat currencies become more closely related; as more people adopt the use of cryptocurrency, it is seen as a safer means of spending.
Today, there are thousands of alternate cryptocurrencies with various functions and specifications, but more are emerging all the time. As one currency becomes popular, money flows into it from other currencies, affecting their price. New currencies being launched can have a diluting effect on the value of all cryptocurrency.
Although, most cryptocurrencies are characterised by having a finite supply and a lower supply can mean higher demand, thereby increasing prices. Some say that this sets crypto aside from the global financial system, in which central banks can effectively print more money, which can lead to inflation and mean the money in your pocket isn’t worth as much as it used to be.
Cryptocurrency has long been a volatile market but with the wider adoption of virtual coins as viable payment methods, crypto should become a safer, more accessible investment opportunity.
How we can help
With wider adoption of cryptocurrencies, businesses need to make sure their onboarding process is robust, compliant and efficient.
Here at Acuant, we provide a range of solutions and specialise in cryptocurrency KYC checks. We offer global verification that takes seconds and all of our solutions are available via our single API, Sodium.
Utilise a single element or multiple processes – it’s entirely up to you. Learn more about how we can help to automate and simplify your verification processes to help you to learn more about your customers.