Understanding endogenous and exogenous variables in economics and crypto

Have you ever wondered why the price of a cryptocurrency goes up or down? The answer lies in how endogenous and exogenous variables function within an economic system. But let's start with the basics: an endogenous variable is one whose value is determined within the economic model itself, influenced by the interaction of other elements of the system. In contrast, exogenous variables come from outside and act as independent forces that affect the model without being affected by it.

How they behave in a simple model

Let's imagine the traditional market of supply and demand. Here, both the price and the quantity of goods sold are endogenous variables. Why? Because their value completely depends on what happens within the market: when demand grows and supply remains stable, the price naturally rises. If the opposite occurs and supply increases while demand remains unchanged, we witness a fall in prices. This internal mechanism is what characterizes endogenous and exogenous variables in their dynamic relationship.

Application in real businesses

Let's consider a company that produces and sells goods. Its endogenous variables include the level of production, revenue, and profit. All of these are interconnected: the company's production capacity, the cost of its inputs, and the pricing strategy create a closed ecosystem where everything influences everything. If the company decides to invest in modern technology to expand its production capacity, we will immediately see changes in the volume produced and, consequently, in profitability.

The role in cryptocurrency markets

In the crypto ecosystem, the price of a digital coin functions as a fundamental endogenous variable. It is shaped by multiple internal market factors: the transaction volume, investor sentiment, and actual demand. When more buyers enter the market seeking to acquire a specific asset, the price responds accordingly to the upside.

The hash rate represents another crucial example of an endogenous variable in networks like Bitcoin. This metric reflects the computational power used to mine new blocks and is influenced by the number of active miners in the network and the complexity of the mining algorithm. The greater the participation of miners, the higher the hash rate will be, creating an internal feedback loop.

What you should remember

Endogenous and exogenous variables are conceptual tools that allow us to understand how economic systems function. Endogenous variables are generated within the model through their own internal dynamics, while exogenous variables come from outside. In cryptocurrencies, recognizing which variables are endogenous—such as price and hash rate—is essential for understanding what truly drives the market.