Cryptocurrency prices change all the time and in addition to that, we’re talking about some of the most volatile instruments in the world. High volatility means price changes are relatively high over a given period of time, but the question might ask is why do they fluctuate? If you won’t already know the answer, Crypto Exchangers will provide you with three of the most important factors driving market valuations.
# Market liquidity
Liquidity means the availability of liquid assets to a market or company and in the case of cryptocurrencies, it means the ability of any particular token to be exchanged in fiat currencies (Euro, US Dollar, Yen, etc.). The trading volume plays a major role in how cryptocurrencies are priced since that shows how many buyers/sellers there are at any given moment on a market.
Speaking of cryptocurrency exchanges, you’ll easily notice that not all of them report the same trading volume each day. As a result, cryptocurrency rates can differ. If we talk about Bitcoin, Ether, XRP, or any large-cap token, the differences are small, due to their popularity. However, when we talk about altcoins, rate gaps could be bigger, due to the low trading volume/liquidity.
Cryptocurrencies that have large market capitalization are the ones enjoying the most trust from the market participants. We’ve already seen what fundamental factors are supporting the Bitcoin’s dominance, the leading cryptocurrency with more than 12 years of existence. Ether, Litecoin, and XRP are in a similar position because there are professional teams of developers working behind them. At the same time, the demand for these tokens had been and continues to be high, explaining the current high market valuations.
As we’ve talked previously, cryptocurrency rates are not the same with every exchange platform and this leads to the appearance of arbitrage (buying on an exchange with a lower rate and selling on one with a higher rate). There are plenty of traders doing arbitrage among different exchanges, and the cumulated volume is able to influence market prices.
The negative point about arbitrage is that it could be influenced by the time needed to transfer tokens from one exchange to another. This leads to market prices persist for longer than they do in other efficient markets.
Even though we could find plenty of other reasons why cryptocurrency prices change over time, market liquidity, trust, and arbitrage are the most important to take into account. If you want to trade cryptocurrencies via an exchange platform, you should fully understand how markets operate.