Cryptocurrencies are known for their market fluctuation and volatility. Traders and investors looking to capitalize on these movements must understand the complex factors driving the prices.
Typical factors such as supply and demand, technological development and market sentiment affect crypto token values. Cryptocurrencies are also subject to a changing regulatory environment and increasing institutional adoption.
With so much uncertainty, investors need to keep a close eye on their crypto holdings. Investing in the second largest cryptocurrency by trade volume, Ethereum, is no different. Tracking the most recent Ethereum price, regulatory news and historical data is important.
Read on to learn more about the factors affecting cryptocurrencies and Ethereum in particular.
Supply And Demand
Supply and demand plays a major role in cryptocurrency values. Unlike Bitcoin, Ethereum has no maximum supply. Bitcoin has a total available supply of 21 million tokens, which was implemented to regulate the market. Ethereum on the other hand has no cap on its total supply. Which would mean that the Ethereum coins in circulation could grow indefinitely, leading to inflationary concerns.
Luckily for investors, Ethereum 2.0 and the EIP-1559 upgrade introduced in August of 2021 have helped to stabilize things. Like the Bitcoin halving occurring every four years, Ethereum is rewarding miners with lower fees. This should reduce the incentive to mine new tokens and thus lower the total supply of tokens.
Technological Advancements
The true value of a crypto token doesn’t only lie in the token itself. The technology powering the token, its blockchain, also plays a significant role. Wider adoption of Ethereum’s blockchain will have a positive effect on the value of the token.
Ethereum is also making a concerted effort to improve its environmental impact, which makes the coin more attractive to investors concerned with sustainability. Ethereum is moving from Proof of Work (PoW) to Proof of Stake (PoS) with Ethereum 2.0, reducing the impact of mining and improving scalability.
Improved scalability has a direct impact on the number of transactions that the cryptocurrency can process and therefore its market share. Sharding has become an important part of this, splitting the blockchain into smaller, more manageable pieces. This increases efficiency on networks and reduces congestion.
Market Sentiment
As with any other asset class, cryptocurrency value is affected by market sentiment. News events, investor attitudes and social media posts impact the token’s value. Positive news features such as the successful launch of Ethereum 2.0, upbeat market forecasts and the introduction of Ethereum Exchange Traded Funds (ETFs) may lead to a bullish sentiment toward the crypto token. So will mentions by influential figures such as prominent investment houses and political candidates.
Negative news will have the opposite effect, often leading to a bearish sentiment. Regulatory changes, security concerns or publicized network issues can affect the price of Ethereum just as quickly as positive news.
Regulatory Changes Play A Part
Regulation is a major hurdle for cryptocurrencies like Ethereum. Governmental organizations are struggling to keep up with the rapid progress in the market. Legislators are continually updating policy, aiming to balance technological innovation with consumer protection. The U.S. Securities and Exchange Commission (SEC)’s scrutiny of Ethereum as a valid security for example, can affect prices significantly.
Apart from the legality of crypto trading after potentially prohibitive legislation has been passed, regulatory changes also impact how cryptocurrencies are perceived.
Wider Adoption And Institutional Investment
Cryptocurrencies such as Ethereum are enjoying more institutional backing, which validates them as trustworthy assets. Hedge funds, venture capital firms and publicly traded companies are investing substantial amounts of capital into the crypto market – driving prices.
ETFs have played a big role in the continued success of Ethereum and Bitcoin. EFTs are similar in design to mutual funds, allowing a larger pool of investors access to cryptocurrencies. The benefit to the individual investor is that they can hold crypto tokens without the need for an exchange or digital wallet. Companies such as Grayscale have launched Ethereum-focused investment products, and Ethereum-based futures contracts are available on platforms like the Chicago Mercantile Exchange (CME).
Macroeconomics Explained
Factors such as inflation, interest rates hikes and geopolitical changes affect cryptocurrencies. The digital nature of crypto tokens does not protect them from larger market forces and investors are aware of this.
Despite the technological advancement of cryptocurrencies, their value is not pegged to any real commodity. The value of each token is determined by the market and based on the strength of the underlying blockchain. As the market moves to avert higher inflation, for example, some investors might move to digital assets to hedge against fiat currency devaluation.
In Summary
Successful cryptocurrency investors and traders will need to bear these factors in mind when buying and selling. It is very easy to be swayed by the current popularity of crypto tokens like Ethereum.
Seasoned investors will know that supply and demand, technological factors, regulatory changes, institutional adoption and macroeconomics all play a role. Traders will need to devise their own trading strategy and stick to it. Employing a sound risk management protocol and keeping their emotions in check will be helpful as well.
As Ethereum evolves, its price will likely remain volatile, offering investors the chance for large potential profits and real losses. Understanding the factors that affect cryptocurrencies will be crucial in navigating the complexities of the Ethereum market.
