What factors affect ETH’s price?
Ultimately, ether’s price boils down to supply and demand.
If the supply of ETH decreases or demand for ETH increases, its price will rise.
If the supply of ETH increases or demand for ETH decreases, its price will fall.
So what factors influence ETH’s supply and demand?
Great question!
Ether’s supply and demand are affected by multiple factors including specific factors particular to Ethereum itself and more general factors ranging from the crypto market to overall global financial market conditions.
In this lesson, I share what kind of news headlines and other information can influence people to buy or sell ETH.
If you follow the crypto market on a daily basis, make sure to pay attention to the following:
Ethereum related news
Logically, news events directly related to the Ethereum network can oftentimes have the biggest short and longer-term impact on ether price.
So, with your newfound knowledge of the Ethereum network and its mechanics, hopefully, you can now identify when potential changes may spark changes in market demand for the ether token.
Keep in mind too that these scenarios and potential market reactions can apply to other layer-1 blockchain tokens like ether as well.
A few scenarios to watch out for that may be bullish are:
Changes to the protocol where future supply may be reduced (i.e., deflationary conditions, fee burns)
Increased transactions per second and/or lower transaction fees: this may fuel the idea that the network will be easier and cheaper to use, potentially attracting more applications and users to the blockchain.
Higher incentives for staking to the network (increased rewards for larger/longer stakes). This scenario argues that if more users are attracted to locking up their tokens in the network for rewards, this reduces the circulating supply. Psychologically, this could push traders to buy more tokens on the idea of growing scarcity, as well as on the idea that with more tokens staked, the more secure the proof-of-stake network is.
Of course, the opposite of the above scenarios increases the odds of less demand for ether. So, any protocol changes that increase inflation rates, slow down transaction times/raise gas prices, or lower incentives to lock in tokens ignite bearish behavior on ether.
Crypto market news and BTC price action
Like most other tradable assets, ether doesn’t trade in a vacuum, meaning its demand dynamics can be influenced by catalysts outside of the world of Ethereum.
Broad crypto sentiment is definitely one of those outside drivers that could influence ether market prices, especially when those moves come from the king of crypto: bitcoin.
Bitcoin is nearly half of the crypto asset space’s market capitalization, so of course, when bitcoin sees volatility, the rest of the sector tends to move with it.
So, consider that dynamic when you see ether moves and no major news on Ethereum is anywhere to be seen. It could be a broad crypto sector move and the first place you may wanna look is for fresh Bitcoin headlines.
Outside of BTC price action, crypto-centric news events could also be a driver in ether price action, most notably headlines regarding crypto regulation.
The crypto asset space is still considered the Wild West of the financial markets with no clear regulations as of yet in most jurisdictions.
It will likely take a few more years for governments to figure out how to handle this emerging, dynamic asset class, so be on the lookout for fresh crypto regulation headlines to be a high probability market mover.
Generally speaking, talks of a country banning crypto trading or mining has generally drawn bearish reactions in the crypto markets. Also, proposals or rules that may introduce “excessive” tax rates on crypto transactions may spark a bearish move as well.
On the other end of the spectrum, any regulatory clarity or proposals to intelligently study the crypto space before writing new legislation seems to have drawn bullish responses in the past.
Other exogenous drivers
Finally, we’ve got to consider influences outside of crypto as potential drivers of ether price action. Again, ether is a tradable asset and just like any other tradable asset, high levels of broad market fear and greed can make traders forget Ethereum-specific headlines in a heartbeat.
Broad market sentiment is often influenced by changes in monetary and fiscal policies, geopolitical events, and shifts in economic performance.
Top-tier headlines from those areas of the market can come almost on a daily or weekly basis, raising the odds of short-term moves in all assets, including crypto.
If you’re not familiar with fundamental analysis, you can visit our lessons on Fundamental Analysis in the School of Pipsology to get started in building those skills.
Fortunately, you don’t have to become a seasoned macroeconomist or geopolitical analyst to understand how these factors may influence ether price action.
There are only a couple of macroeconomic factors that tend to generate broad financial market moves big enough to influence crypto.
Changes to monetary policy tend to be the biggest market movers as interest rate dynamics strongly influence financial asset prices.
And when it comes to monetary policy, inflation and economic growth data tend to be the biggest inputs into monetary policy/interest rate speculation.
Be on the lookout for news releases regarding inflation (CPI and PPI), manufacturing, employment, GDP, and business and consumer sentiment surveys.
Now, every fundamental scenario should be analyzed on its own, but a great starting point and the general rule of thumb are:
When growth and inflation are high, the markets tend to speculate that central banks will likely raise interest rates to slow down a hot economy. This tends to spark a move away from risk assets like equities and crypto.
When growth and inflation are low, the markets tend to speculate that central banks will likely lower interest rates to ignite a slow economy. This tends to push capital towards “risk-on” assets like equities and crypto.
In scenarios where growth is high vs. low inflation rates or growth is low vs. high inflation, traders tend to focus on inflation since a primary mandate for central banks is price stability. If inflation is high, markets will more likely price in higher odds of a rate hike, and vice versa.
Obviously, there’s much more to learn about global macro analysis, but starting with a focus on monetary policy, inflation, and job growth is a great place to get your daily practice going.
Final Tips
Here are some final tips when trading ETH:
Cryptos are still an emerging asset class and technology. Price volatility for ether is high and will remain high for years to come.
Manage your risk accordingly. 50% – 80% drawdown scenarios have been seen in the past and are still a possibility in the future.
Don’t use leverage to trade crypto.
Regularly keep up-to-date with Ethereum developments. Changes will be made to the protocol as adoption and use cases grow. This could change the current bullish/bearish sentiment on ETH quickly.
If you’ve made it this far, then congrats! You now have the base level of knowledge needed to start your journey into ether (ETH) trading.
You can now start analyzing the different themes/narratives that are likely to influence supply & demand for ether, as well as recognize potential catalysts that may drive the price action in ether in the future.
The next step is to start putting this knowledge into practice, turning it into ETH market analysis and trading skills.
To do that, we need to apply a framework of daily practice to that knowledge, and if you’re new to that as well then you can start with my“Beginner’s Guide to Trading Crypto” course.
You’ll learn a simple process on how to build a crypto trading strategy. Check it out!
