The emergence of cryptocurrency: understand supply and demand in the fastest growing industry
In recent years, the world of finance has witnessed a seismic change with the emergence of cryptocurrency. From its humble beginnings as an unregulated digital currency to the current phenomenon of decentralized assets based on blockchain, the cryptocurrency has captured the attention of investors, the components of polyics and individuals worldwide. However, in the midst of the emotion surrounding this market in rapid evolution, two critical factors have been crucial to shape its trajectory: supply and demand.
** What are supply and demand?
The referents of supply to the available amount of an asset or in particular, while the demand is the number of buyers willing to pay it. In the context of cryptocurrency, both supply and demand constantly change due to several market forces. When the demand exceeds the supply, prices tend to increase as buyers exceed vendors, which leads to an increase in value. On the contrary, when demand does not reach supply, prices can decrease.
The role of supply in cryptocurrency
In cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH), the supply of new currencies is limited to a certain number or limited, known as block reward. This limit serves as a mechanism to prevent inflationary pressures while guaranteeing that each currency has a unique direction and can be used for several transactions.
For example, when a new block is extracted in the Bitcoin block chain, 50 new units are added to BTC’s total supply. The difficulty in extracting new coins increases exponentially over time, which reduces the number of new currencies that can be created at any given time. This limits the inflation rate and summarizes the value of existing currencies to increase as demand grows.
The role of demand in cryptocurrency
Demand is a crucial factor that drives cryptocurrency prices. As more people adopt cryptocurrencies for their investments, transactions or cases of daily use, such as online purchases or pairs, create an increase in supply.
For example, when the Bitcoin value increased to a historical maximum in 2017, thousands of investors charged their holdings, which led to greater demand and appreciation of subcontan prices. Similarly, during periods of economic uncertainty or market volatility, more people are interested in investing in cryptocurrencies, creating a purchase frenzy that increases prices.
Why supply and demand are important
Understanding the interaction between supply and demand is vital to predict cryptocurrency markets. When analyzing these factors, merchants, investors and policy formulators can make informed decisions about investments, allocation of regulatory assets and policies.
Examples of successful strategies:
- Speculation: Investors that buy a cryptocurrency with high market capitalization (such as Bitcoin) at a low price tend to sell it at a higher price before market correction.
- Coverage: Operators use future options and contracts to speculate on future price movements, often taking a position in a cryptocurrency that is expected to increase in value or decrease demand.
- Adapted to market events: Cryptocurrency prices are influenced by several events, including regulatory changes, market feeling and global economic tendencies.
Challenges and controversies:
While supply and demand play a crucial role in promoting cryptographic market, severe challenges should be addressed:
- Regulatory uncertainty:
World governments have varied regulations on cryptocurrencies, creating uncertainty among investors.
- Volatility:
The prices of cryptocurrencies are notoriously volatile, which makes it difficult for merchants to predict price movements.
- Safety risks: The decentralized nature of cryptocurrency transactions increases the risk of safety and piracy violations.