The technology behind cryptocurrencies may be challenging for most people to understand, but how the markets increase and decrease is less mysterious and more similar than dissimilar to many other asset classes.
One of the most noted issues about cryptocurrencies, and one that seems to make the headlines on a weekly basis, is the volatility in the markets. This can include dramatic increases in value and also dramatic declines in value.
The challenge for most people is there is no centralized control or governing of cryptocurrencies, which can make the volatility appear random. Understanding how this digital currency increases in value will help to know when and how to invest.
Supply and Demand
Fiat currency is a currency that is under the control of the government. It is not backed by a specific asset, such as gold or precious metals, so the value is controlled by the government or organization that issues the currency. The government can print more money or print less to control the value of the currency.
Unlike fiat currencies, cryptocurrencies, prices are based on the dual factors of limiting or restricted supply and increasing demand. The more people that buy and use a specific type of cryptocurrency, the higher the value. The more businesses, people, and organizations, including governments, use any given cryptocurrency, the higher the value.
As the major cryptocurrencies, including Bitcoin, are increasingly held as an investment asset, the higher the demand and the lower the overall supply, all of which tend to boost the value of the digital currency over time.