The Logic of Cryptocurrency Price Fluctuations: The Core Principle of Supply and Demand!
Demand is the key driver of price increases. When the demand for a particular cryptocurrency surges, investors rush in to buy, leading to a rise in price. The increase in demand can come from various sources: large purchases by institutional investors, recognition of a project's technology and prospects by developers and users, media and social platform hype, etc. For example, when Bitcoin became a 'safe-haven asset' for institutional investors, market demand surged dramatically, driving the price sky-high.
Secondly, supply in the cryptocurrency market is relatively fixed. Most cryptocurrencies have a limited total supply, with Bitcoin setting a maximum supply of 21 million, making its supply more scarce. The limited supply combined with increasing demand often creates intense upward pressure on prices. Conversely, when supply is excessive, or market confidence in a particular coin wanes and demand decreases, prices will be suppressed.
However, the uniqueness of the cryptocurrency market also lies in its extreme emotional volatility. Participants in the cryptocurrency market tend to be quite emotional, and some news, celebrity statements, or policy changes can have a drastic impact on demand. Particularly during explosive growth in decentralized finance (DeFi) and NFTs, a surge in demand can lead to skyrocketing prices overnight.
Moreover, cryptocurrency prices can also be influenced by market manipulation. Large investors (i.e., 'whales') may manipulate the market by buying or selling in large quantities, profiting from supply-demand imbalances. For small retail investors, this means that market prices often do not fully reflect the intrinsic value of the project but are more influenced by market sentiment and manipulation.
In summary, the fluctuations in the cryptocurrency market are primarily determined by the relationship between supply and demand. When supply is limited and demand is strong, prices will rise; conversely, they will fall. Investors need to deeply understand the driving forces behind market demand and remain sensitive to emotional volatility and market manipulation in order to make informed decisions in this highly volatile market.
