What causes the price of crypto to fluctuate?

Cryptocurrency was invented to try and solve real-world problems. Some would argue, however, that crypto has strayed from its original purpose - and that a number of external factors are to blame.

First things first, what was cryptocurrency’s original purpose? Let’s look at the world’s first established cryptocurrency, bitcoin. The motivation behind it was to create a currency that works without trust. It sought to address the world’s reliance on traditional financial institutions as intermediaries by removing them from transactions altogether.

Since bitcoin’s inception in 2009, the focus seems to have shifted from its intentions as a trustless payment network to its ever-fluctuating value. According to the Verge’s Elizabeth Lopatto, as its price rose, bitcoin became an “investment vehicle for the financial system it was meant to replace.”

Are the people benefiting from bitcoin the very ones it was designed to bypass? And if so, what caused this happen? Let’s have a look at some of the external factors affecting the cryptocurrency market.

Political & economic uncertainty

In times of political unrest, the value of fiat currencies tends to drop due to a loss of confidence in governing authorities. Sukhi Jutla, co-founder of blockchain-based jewellery marketplace, MarketOrders, explains that this leads to people seeking out “assets that are not controlled or influenced by one party.”

In other words, crypto. In 2016, the fear surrounding Brexit led to an increase in the price of bitcoin, as did the election of Donald Trump later that year. During the Black Lives Matter protests in the US last year, bitcoin was described as a peaceful protest against corruption.

Countries experiencing economic crises such as Venezuela and Zimbabwe have turned to digital currency as a hedge against inflation. In the same way political unrest causes people to look to alternative monetary systems, world financial instability can shake faith in fiat currency.

Celebrity influence

Whether you want to call them celebrities or influencers, a number of household names have turned their attention to crypto in recent times. And, unsurprisingly, money is usually the motive.

Kim Kardashian was recently paid to advertise altcoin EthereumMax, and Paris Hilton somehow made 40 ETH ($17,000) for a digital painting of her cat.

That brings us to bitcoin’s biggest influencer, Elon Musk. A tweet alone from the Twitter-happy Tesla CEO can cause the price of bitcoin to rise 20% in a matter of hours.

Technological advances

Technological innovations are likely to influence people’s adoption of crypto, and in turn affect its price.

In 2017, the price of bitcoin was negatively impacted by a controversy surrounding its underlying technology. Its price shot back up a couple of months down the line, due to positive developments to rival altcoin, litecoin. A change to litecoin’s code meant an increase in transaction speed, which bitcoin fans took as a sign that their crypto bias could receive the same treatment.

A more stable alternative

Does crypto’s inherent volatility mean it can’t fulfil its original purpose? Its wildly fluctuating value could well discourage people and businesses from adopting it as a payment method. But some believe that crypto can be both the trustless medium of exchange it was originally intended to be and a so-called investment asset.

There is an increasingly popular alternative which could address this contradiction. Stablecoins not only offer the same benefits as bitcoin and other altcoins thanks to their decentralised, transparent nature, they also maintain a stable value while doing so.

What other factors do you think affect the value of crypto? Do you think its volatility means it can’t achieve all it set out to? Or could stablecoins be the answer? Let us know below!

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