The cryptocurrency market has taken the world by storm. And while volume and liquidity have moderated since peaking in December of 2017, the markets remain robust. The cryptocurrency market can be traded in conjunction with fiat currencies such as the dollar, yen and the euro. It also can be traded as a cross currency pair. While there are several reasons for currency pairs to fluctuate, the main driver of fiat currencies is interest rates. When you are trading a cryptocurrency pair, you must be aware that if you are trading it against a fiat currency like the dollar or the euro, there are multiple factors that will drive the exchange rate. You can follow both currency and cryptocurrencies on a mobile trading platform.
What Drives Currency Trading
The fiat or sovereign currency market is the largest capital market in the world. Currency pairs such as the EUR/USD make up most of the transactions that change hands. Currencies are traded for several reasons including hedging, locking in profits and speculation. There are nearly $5-trillion worth of currency trades transacted daily around the globe.
While there are several reasons why a currency pair will fluctuate over the long term, currency pairs often move because of changes in interest rates. Sovereign interest rates drive currency fluctuations because they make a country more attractive to invest in. For example, if you are earning 5% by investing in the US dollar compared to 1% when investing in the yen, the 4% interest rate differential will drive investors to the greenback.
Economic events as well as monetary policy announcements are critical to the future movements of a currency pair. Traders often follow the announcements of a central bank, which can change the course of a currency pair. In addition, there are several different economic releases such as GDP, inflation and employment data that will alter the direction of a currency pair.
How Do Cryptocurrency Pairs Fluctuate?
The fluctuations that are experienced by crypto currencies are based on several factors. They include both the supply and demand for the crypto currency and the supply and demand of a fiat currency. For example, if the demand for bitcoin rises relative to the US dollar, then the price will rise. What escapes many traders is that when you trade a cryptocurrency against a fiat currency, the demand for the fiat currency also helps generate fluctuations in prices.
When the dollar is increasing in value, not only will the EUR/USD move lower, but BTC/USD will also be affected. And while economic events and monetary policy effect cryptocurrencies, they generally have a greater influence on cryptocurrencies that are paired with sovereign currencies such as the BTC/USD (as opposed to BTC/ETH).
When you trade one crypto currency pair against another, there is no interest rate that drives the price of the currency pair. Cross crypto currency pairs are driven by supply and demand as well as technical analysis factors. Technical analysis is the study of past price action and is used by many traders to determine the future direction of an asset.