Cryptocurrency prices do not move in the same way as share prices, although there are some similarities. Crypto prices are exceptionally volatile, for example, Bitcoin‘s price rallied from around $10,000 in early 2020 to an all-time high of nearly $69,000 in November 2021, then dramatically fell back below $20,000 within 6 months. The second most popular cryptocurrency, Ethereum‘s price rose from $200 in early 2020 to more than $4,800 in November 2021, before dropping to around $1,000 in mid-2022.
The worst, of course, is Dogecoin, which seems to move at the whim of Elon Musk’s tweets…
But, some stocks are equally as volatile, two of the most heavily traded stocks in the US Tesla and GameStop have massive swings.
Tesla’s stock price rose from around $90 in early 2020 (taking the split into account) to over $1,200 by late 2021, a gain of over 1,200%. However, it then dropped to below $700 by mid-2022. GameStop was also bashed about in early 2021 during the Reddit-fueled “meme stock” frenzy. GME went from $18 in early January 2021 to over $480 by the end of the month, before falling back to around $150 by mid-2022.
What do these major cryptos and stocks have in common, sentiment and speculation? What really moves crypto prices is whether or not people want to buy them. At least stocks have some intrinsic value, but cryptocurrencies are yet to define a proper use case.
- Want to invest in crypto? Read our guide on how to buy cryptocurrency.
In the rest of this guide we look at some factors influence on the price of cryptocurrencies:
Speculation
There are two aspects to this. First, crypto enthusiasts say the technology will supplant existing financial systems and therefore it is wise to invest early. Based on this, speculators have bought in the expectation that certain cryptocurrencies will be worth more in the future. Fundamentally, with no intrinsic value in the assets, the primary basis for the rapid rise in prices seems to have been speculatively driven.
This does not necessarily mean that prices are in a ‘bubble’, but a key characteristic of asset price bubbles is that they are driven by speculative buying based on the hope that the asset will be worth more in the future than it is today.
Cryptocurrencies produce no earnings (or yield) and therefore there is an opportunity cost associated with holding them – the cost of having your money invested in cryptos rather than a yield-bearing asset such as bonds or stocks.
For example, if £100 of HSBC stock produces a dividend of £5 every year and there is no capital growth (ie, the stock price doesn’t change), in order for £100 of investment in a cryptocurrency to return more, you would be depending on capital growth in your crypto investment of at least 5%.
The lack of yield on cryptocurrencies and the opportunity cost of holding them is seen as a barrier to price growth which is in addition to concerns about price volatility.
Hedging
A reason touted by crypto enthusiasts for their ‘value’ is that they act as a hedge against financial meltdown or currency manipulation by governments and central banks. Because they are based on blockchain technology, they cannot be devalued in the way that fiat currencies may be. As a hedge against financial turmoil, however, it’s highly debatable to what extent they demonstrate any use.
Volatility in prices means their value as a means of exchange and store of value is dubious. In contrast, gold, which enthusiasts would like to supplant with cryptos, is far less volatile and has been used as a financial hedge for centuries.
However, if a consensus builds around the ‘fair value’ of one or two certain cryptocurrencies and prices settle down for a number of years in a reasonably arrow range, then they may be said to exhibit the kind of stable characteristics desired by investors.
Production Costs
Mining is the process that creates new coins and it comes at a cost, both in terms of financial (energy) and time. The financial cost of bitcoin may be said to underpin its price – it has to be worth more than it costs to mine or no one would bother. However, cost of supply does not determine market value.
Regulation
Regulations act as a driver but their effect can vary. Regulation can be seen as a good thing, bringing cryptocurrencies into the mainstream and making them more legitimate in the process. On the other hand, regulation can reduce the appeal of cryptocurrencies as well; for example by requiring investors to pay tax on profits or by simply banning trading on exchanges.
It remains unclear whethergulatory clampdown will crush cryptocurrencies or whether it will allow some or all to flourish. Until now, cryptocurrencies have been able to thrive in a relatively unrestricted marketplace as regulators simply haven’t known what to do with them.
Increasingly, however, there appears to be a global, partially-coordinated effort to control and restrict cryptocurrencies.
Supply
Existing cryptocurrencies may suffer declines in value if and when emerging new cryptos appear that do things faster and/or cheaper than those that have gone before. Indeed the infinite potential supply of new cryptocurrencies is one of the key arguments against investing in them as an asset class.
On the other hand, the limited supply of Bitcoin is an argument in favour of its price appreciating; i.e. it is said to have deflationary characteristics as opposed to the fiat currencies which are inflationary as the supply of new money is limitless (the Bank of England can if it chooses to, print as much as many new pounds as it wants).
It is worth remembering that the post-crisis quantitative easing policies pursued in many developed countries has been linked to the development of cryptocurrencies as they are viewed as a means to avoid what some monetary purists perceive as open manipulation of the money base by central banks.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
You can contact Richard at richard@goodmoneyguide.com
