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Why does cryptocurrency price change?

In this guide, we break down how and why the cryptocurrency prices are changing all the time and what factors come into play.

Cryptocurrency price is volatile, and the prices change all the time. In this guide, we take a look at why they change and why they are different depending on the exchange you are using.

Before we begin, it is worth noting that if you are checking crypto prices on a site like CoinMarketCap, it will be different to an actual exchange. This is because it collates all the data from several exchanges to provide the most rounded price available. However, since it has to process all this data from exchanges, it isn’t always up-to-date.  It’s also worth noting that different exchanges have different price algorithms. This will also be a factor in price listings since some may process faster than others.

Let’s take a look at three things that impact cryoptocurrency price.

1) Liquidity

Liquidity refers to the availability of liquid assets to a market or company. In the world of crypto, liquidating an asset means trading it for fiat currency (a national currency). However, the amount you will receive for liquidating an asset will largely depend on the market and exchange.

Trading volume is one aspect that affects liquidity pricing. Trading volume refers to the number of shares (or units of crypto) transacted every day. Since there is a person selling for every one person buying, you can think of trading volume as half of the number of transactions made in a day.

If you look at different exchanges, you will see that each one has a different trading volume for Bitcoin. Whilst the Bitcoin price isn’t drastically different across these exchanges, there are slight variations.

Be sure to look out for the order book on each exchange. An order book is a collection of live trading that occurs when a trader sets a price that they will buy/sell an asset at. As you can imagine, there are a lot of trades occurring at every moment. This is because the cryptocurrency trading market is open 24/7. Each of these traders will be buying and selling at prices they are speculating, resulting in price movements up and down at all hours of the day.

If liquidity is low overall, the order book will be less stacked. This in turn affects the price of cryptocurrencies as trading volume goes down in tandem. So, remember that if liquidity is down, the prices will be changing.

2) Media and reputation

Whilst there are factors that stem directly from the markets that affect the pricing of assets, the media can also influence them. In particular, if a cryptocurrency gains mainstream attention, there could be a sudden surge in popularity. This then spurs traders to start avidly buying that token, which drives the price up. Equally, the opposite can occur. If a token or an exchange gains a bad reputation in the media it can prompt traders to cash out before the price plummets and they lose more money.

3) Arbitrage

Arbitrage refers to the simultaneous purchase and sale of an asset to gain profit from an imbalance in price. For example, let’s say you have noticed Bitcoin has a lower price on one exchange compared to another. You may want to take advantage of that. So, you buy the Bitcoin at a lower price, withdraw it, and aim to sell it at a higher price on the other exchange. However, transferring money or assets across exchanges can be inefficient as more often than not, bots typically pounce on any arbitrage possibilities before traders can, or the exchange fixes the price before you’ve had a chance to sell.

Since it can be difficult for traders to arbitrage differences, it allows for prices in markets to persist for longer than they would in a more efficient market. This is by no means absolute, since the impact of bots can affect arbitrage, but this is another occurrence that may ultimately affect prices on exchanges.

Conclusion

There are more reasons why cryptocurrency prices change between exchanges, and this list is by no means exhaustive. If you are looking to get into trading with cryptocurrency, be sure to do your own research as well before committing to any decisions.

For more information and guides from Coin Rivet, click here.

 

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