Factors affecting the exchange rates

Cryptocurrencies are trading instruments, and thus their exchange rate is determined by supply and demand. They are more similar to shares and securities, rather than currencies, as their price movement is more demand-driven, with no monetary policy or central bank backing them.

The supply of most cryptocurrencies is determined when they are issued. The algorithm of cryptocurrencies specifies the maximum volume of tokens issuable and issuable per block at the time of launch, which is the basis for a decentralised operation. Thus, their volatility and exchange rate cannot be influenced by a single central entity (central bank or regulatory authority, etc.). The second pillar of decentralisation is that, in order to ensure the stability of the network, the supply of cryptocurrencies is typically spread across many wallets, so that no single actor can influence the exchange rate by selling a significant number of tokens. Nevertheless, the supply structure can affect the token’s value, which is part of the fundamentals of cryptocurrency. A network with a broader ownership structure, i.e. with more “holders”, is more reliable and, by definition, more popular, which increases its value amongst the traders.

The technological background of cryptocurrencies also affects their value. The nature and quality of their coding language, and the technology (by which they can be developed on the network) have a major impact on their performance and security.

The demand for cryptocurrencies is determined by the above factors, which ultimately drive the exchange rate. In addition, partnerships with major economic players have the potential to boost demand. For example, when popular companies start running certain business processes on the blockchain of a cryptocurrency. A good example is the game developer Ubisoft, which has started running some of its projects on the Ethereum chain.

An additional driving factor for the exchange rate is when the token becomes available for mass use. The more realistic and lifelike situations a cryptocurrency can be used in, the wider the user base it will reach, so developers should aim to achieve this.

There are also various reasons for a fall in the exchange rate, one of which is the legislation affecting the crypto market become more stringent, which affects the market as a whole, and all market participants. Such restrictions may include a partial or total ban, as China has attempted.

Cryptocurrency price movements can be significantly influenced by large crowds buying up cryptocurrencies in the hope of making quick profits. When this happens, the exchange rate can raise to its multiples in days or even hours. This process is usually supported and driven by a targeted, high-budget marketing campaign, mostly online and on social media. The bad news is that when investors start to harvest the profit, i.e. start to sell, the mass sell-off can lead to a similarly extensive and rapid loss in the value. 

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