The main drivers of the price of a token after successful completion of ICO sales may be as follows:
- Limited supply and demand
- The benefits of the currency, and how easy it is to use and store it
- Perceptions about its value in the public
- Price of Bitcoin
- Market dilution
- Trust in conventional systems
- Legal-/government matters.
Supply / demand
Precious metals gain in value due to their usefulness and limited supply, and the price is often linked to the principle of supply and demand. This principle is a simple economic factor which affects the price of many things. In some countries, Bitcoin and other crypto currencies are classified as assets, in others as currencies.
Bitcoin, for example, has a maximum of 21 million whole units, 100 million times divisible. With more than 7 billion people in the world, it is true that even if only 1 billion people were to purchase Bitcoin, 21 million whole units would without a noteworthy price not spread very far.
The supply is also purchased at a constant pace and cannot be changed due to the rules. This creates a supply which is limited, and therefore people will pay more to get coins that are expected to rise in value according to their view. The regular halving of the block reward, such as the 50% cut in 2016, causes a price increase. This may have an impact on the price of many other crypto currencies.
A key factor to the price of each crypto currency and Initial Coin Offering is its benefit. If you cannot use it for anything, be it an investment or for payments, then an Initial Coin Offering would have no or little perceived value. As far as Bitcoin is concerned, they can be used for payments on an increasingly large scale, which means that their use is high. The high degree of difficulty and the high energy consumption cause a high price and can therefore be used for an investment. Shifts in the utility value could cause price volatility. In the case of Ether, this is a practical tool as it is an intelligent contract platform, which has increased the price of Ether over many other alternative crypto currencies.
The public perception of a crypto currency has a major influence on its performance. The impact of this public perception within the context of media coverage can, however, have both positive and negative consequences. Driving factors for example may be people’s positive reaction to the innovations associated with crypto currencies. Many also see digital currencies as a legitimate way of forcing the — in their view — largely corrupt banking sector into a competition that could not otherwise be manipulated in the traditional way. Critics of digital currencies, on the other hand, often refer to negative reactions and associations with crime.
Hacks in important crypto currency exchanges such as Mt. Gox could also adversely affect the reputation of digital currencies and crypto tokens as well as their price. On the other hand, innovations such as multi-signature security for e-wallets or for payment gateways can generate a positive response. Many crypto currencies reuse the Bitcoin code and change only some of the specifications, such as the coin supply, the operating algorithm or other features.
Price of Bitcoin
Bitcoin are often seen as the “reserve currency” of the crypto currency world. If the price rises or falls, this often has an effect on other crypto currencies. Namely Litecoin often has price responses that are proportional to the increase and fall in price, but without the difficulties which Bitcoin encounters in terms of power to secure the two blockchains. Since Bitcoin was the first crypto currency and is most widely supported, the price of Bitcoin can impact the other crypto currencies.
The media reporting on Bitcoin in a positive or negative way can influence the public perception of Bitcoin and the price. This can even be used as a way of manipulating the price, since many media companies are owned by a few people, and it is an important factor for potential price manipulation if positive and negative aspects of the currency are reported, which can cause the price to fluctuate.
With all crypto currencies, especially the smaller, lesser-known ones, investors can manipulate / inadvertently influence the price in the following manners:
- With a large amount of capital, a large percentage of tokens can be purchased. These major investors can then try to promote good news about the tokens to drive up the price and sell the tokens quickly with profit.
- Investors who make a large investment in a small Initial Coin Offering may cause accidental price increases and losses.
- Investors who have confidence in a crypto currency can encourage other investors to also invest, and the more investors and demand for a particular currency, the higher the price.
This is not so much true of Bitcoin, Litecoin, Peercoin or Ether, all of which had a unique purpose at the time of development. There are plenty of new crypto currencies that are launched every day. Due to the many crypto currencies, which often saturate the market without any practical benefit, alternative crypto currencies can find it difficult to gain ground in an already diluted market: Bitcoin was the first to stand out with good development, Litecoin shone as silver against the Bitcoin gold, Peercoin used an innovative combination of POW and POS (Proof of Stake). Ether had a handy tool to be a smart contract token that enables distributed, secure execution of intelligent contracts at the cost of what the Ether token is, which very few crypto currencies can do.
Since many crypto currencies are a clone of Bitcoin, innovation is another thing that can have an impact on price. Sometimes this leads to a currency gaining ground, what in itself is sometimes not sufficient, but it is a price factor. Innovation on its own does not always suffice. However, innovation can be a driving factor when it brings something unique and highly useful to the table.
Trust in conventional systems
If confidence in traditional systems increases, such as the price of the Euro, this can lead to some people relying again on the storage of assets with traditional currencies. This can have an impact on the price of Bitcoin in particular, and thus on the other crypto currencies, where Bitcoin is de facto the reserve currency of the cryptographic world.
Legal and regulatory matters
Legal and governmental matters can have an impact on the price. Legal steps that are positive for a crypto currency, such as its official function as a currency, can have a positive effect, while a country that prohibits it could create an adverse effect. Ecuador banned the currency, while some other countries officially recognise crypto currencies as a currency for tax purposes. The lack of a legal framework in many countries continues to be an obstacle, as the precedents for crypto currencies are not yet complete. Due to the limited control over crypto currencies on the open Internet, it can even be used against the will of a government.
Volatility of the crypto currency
Since the crypto currency is an emerging market and due to the changes it imposes on the financial system, the market is still volatile. In conjunction with many of the factors mentioned above, the price of a token can rise and fall rapidly. The volatility decreases over time though, which hopefully will lead to lower fluctuations in the prices of all crypto currencies.