Cryptocurrencies are digital assets that aren’t tied to any physical assets. But on the trading market, cryptocurrencies still have value and even exceed diamonds' value at some periods.
After cryptocurrencies have been around for a few years. The financial principles of demand and supply theory were the most player factor. Has the upper hand in the price of crypto and the coin valuation. However, expertise uses technical analysis and fundamental analysis to get better price predictions.
Still, crypto is seen as one of the riskiest investments because the price can change a lot in a short amount of time, which means that investors have a greater chance of either making a lot of money or losing all of their money.
Good economic conditions, which aren't the case right now, increase the appetite for risky investments. As a result, when investors are flush with cash, a lot of it flows into the cryptocurrency, and vice versa.
Supply and demand volumes determine the price
The crypto supply is tied to the mining process. Due to the fact that crypto mining is limited and hard to do, the price of some crypto coins is still pretty high. On the other hand, demands are based on an investor's mood when making risky investments.
The demand rises due to the high volume of cash flow, the market enters a highly volatile mood, and traders' transactions make the price move rapidly. Since this is the main factor that keeps cryptocurrencies moving, traders' willingness to make risky trades is the main factor that makes them more volatile. Also, investors pulling money out of the cryptocurrency market show a drop in demand, which has a huge effect on the value of the coins.
In 1890 Alfred Marshall created the market supply and demand theory in determining price. Supply and demand can affect the price of any product, and this theory is known as a macroeconomics theory. So, when the economy is doing well, and there is a lot of cash, the demand for products and commodities rises, and investors are more likely to make risky investments when the economy is doing well.
When the demand for cryptocurrencies goes up, prices go through the roof. Therefore, more people get into the market, which will make the demand go up even more. But when the table turns upside down and bad or mixed economic news comes out, investors begin to pull their money out of the market to put it into safer investments.
However, one of the challenges the crypto market faces is trustworthiness. In recent days, FTX's bankruptcy has cast a shadow on the market, bringing some coins to levels not seen in a long time. Therefore, the trust could hit demand hard because it is one of the most important factors influencing investors' decisions.
Demand could trigger a price spike
Dogecoin's all-time high price was $0.64, which happened on May 7, 2021. At the time, Dogecoin was a hot topic among market traders. Elon Musk's tweets on Twitter encouraged people to bet on the coin in order to profit from price increases. However, after the pick on May 7, the bubble burst and the price plummeted; the traders left and stopped holding Dogecoin, resulting in a more than 1,000% drop in price. This shows how something with no value can become valuable if enough people want it.
The theory of supply and demand has been usable throughout history, and factors varieties are specifying the demand and supply of commodities, products, or crypto, which makes it one of the oldest theories living until nowadays.