Cryptocurrency has been steadily rising into being an extremely valuable asset and gaining mainstream adoption. While cryptocurrency is a valuable asset, exchange rates play a major role in the market capitalization and value of the cryptocurrencies. In this article, we would be looking into factors that determine the cryptocurrency exchange rate of the numerous cryptocurrencies we currently have.
Determinants of Cryptocurrency Exchange Rate
There have been a lot of questions raised in the past on how cryptocurrencies which only exist digitally can have so much importance. The reason is quite simple; the principles of economics are the primary determinants of these exchange rates which are the principle of scarcity, demand, supply, and utility.
For instance, if a commodity or service is rare but very useful, its demand would be high and it would be supplied at a high price. To better understand this principle, let’s use a precious stone such as diamond for example. The cutting and mining process is tasking but it is the strongest precious stone thus far. Due to the fact that it is scarce and its usefulness is immense being that it can be transformed into pieces of jewelry, its demand is high and it goes for a high price. This is how it is with cryptocurrencies. In line with this, the amount of Bitcoin that would exist is only 21 million as against the world population of over 7 billion. This clearly explains the principle of scarcity and utility.
Aside the above mentioned economics principles; there are other factors that affect the price of cryptocurrencies such as mass adoption, scandal, regulations, the value of fiat money – for instance, if the value of fiat money (USD) declines, the price of Bitcoin will incline since many traders will have money for their Bitcoin.
To sum it all up, currently, there are over a thousand cryptocurrencies and the exchange rates for each of these cryptocurrencies primarily determined by the forces of demand and supply as explained above. That being said, in-depth research into the platform should be done when choosing an exchange.
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