Supply and demand in crypto

The law of supply and demand is an ancient economic theory that subsequently relates to increasing or decreasing cryptocurrency prices.

• People’s interest in crypto and the availability of the currencies in the market affect their value and prices.
• Demand is the level of interest in a specific cryptocurrency among crypto enthusiasts, whereas supply is the amount of available cryptocurrency.
• Like other assets, supply and demand influence the price and value of cryptocurrencies in various ways.

Crypto represents a group of digital tradable assets. Consequently, people’s interest in crypto and the availability of the currencies in the market affect their value and prices. To become a successful crypto investor or trader, the law of supply and demand must remain an essential skill. This knowledge will help crypto investors fully understand crypto price movements and the bull and bear markets.

Crypto market price controls

Many factors affect the value and price of cryptocurrencies, but supply and demand have proven the most significant. Supply and demand have prominent factors that determine the value and price of cryptocurrencies. For instance, if users are not interested in buying a particular coin, the demand for that coin falls, leading to a bearish price trend.

Beyond supply and demand, other factors affect the value and price of cryptocurrencies. These include regulation, crypto market competition, and media hype. Calls for the regulation of the crypto industry have intensified recently. However, regulation has a significant effect on cryptocurrency prices. The recent unfortunate events, including the collapse of crypto exchanges such as FTX, fueled the calls for regulation.

Government regulation can affect cryptocurrency prices either positively or negatively. For instance, governments’ ban on cryptocurrency can affect the prices negatively. In the same measure, government approval for digital assets can bullishly affect cryptocurrency prices.

Competition within the crypto industry also affects the price of digital assets, in most instances, negatively. For example, owing to the massive charges on the Ethereum network, many crypto investors have switched to the BNB Chain or Solana. Consequently, this reduces Ethereum’s value. As another example, the creation of Shiba Inu as a Dogecoin rival has significantly affected the price of DOGE.

Furthermore, social media hype has also proved to be a significant factor affecting cryptocurrency prices. Celebrities like Elon Musk and Jack Dorsey have proven influential figures in crypto price movements. Sometimes, a single tweet is enough to drive crypto enthusiasts to invest money in a particular project. Crypto developers have termed social media as an indispensable tool for the success of various crypto projects.

READ MORE: Debunking Bitcoin’s volatility amidst the recent decline

Supply and demand in crypto markets

The law of supply and demand is an ancient economic theory that subsequently relates to increasing or decreasing cryptocurrency prices. According to the law, the scarcity of any cryptocurrency on the market will raise demand and possibly drive the price higher. Consequently, the price of any cryptocurrency trader’s demand on the market will likely be higher.

For instance, Bitcoin is designed to become scarce over time, causing its price to increase as time passes. The developers of Bitcoin programmed the system so that the minting of new bitcoins is halved every four years; this process is known as halving.

In simple terms, demand is the level of interest in a specific cryptocurrency among crypto enthusiasts, whereas supply is the amount of available cryptocurrency. Typically, the prices of cryptocurrencies with a significant supply and easy accessibility are lower. Those with extremely limited supply or scarcity have a much higher value and price on the market.

The maximum and circulating supply of a cryptocurrency also play a role when establishing the price movement of a cryptocurrency. The circulating supply of a cryptocurrency represents the amount of that cryptocurrency that is publicly accessible. Crypto’s circulating supply can increase or decrease based on how its developers programmed it to function. For example, Bitcoin’s circulating supply will grow until the maximum supply of 21 million is reached.

On the other hand, the highest supply of a particular digital asset represents the maximum quantity of that cryptocurrency that can ever be created. This means that miners cannot mine any more coins by any means after Bitcoin reaches that limit. For instance, for Bitcoin, the maximum number of coins that miners will ever create has a limit of a maximum supply of 21 million coins,][

Effect on the crypto market

Like other assets, supply and demand influence the price and value of cryptocurrencies in various ways. If a cryptocurrency is in high demand on the market, its price tends to rise relative to those purchased by others. In contrast, if a cryptocurrency has minimal market demand, its price will likely decline.

In January 2023, for instance, a new token known as Bonk was in high demand, causing its price to surge. Due to the high demand, this token’s price increased due to frantic purchasing activity. However, the token’s demand dropped as time progressed, resulting in a tremendous market loss. This theory also pertains to other cryptocurrencies, including Ethereum and Bitcoin, the two most prominent cryptocurrencies.

READ MORE: What is crypto tokenomics: An evaluation guide to crypto investors

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• Source: https://web3africa.news/2023/05/28/news/supply-and-demand-in-crypto/