The cryptocurrency market has attracted the attention of many people and continues to gain popularity. The most advanced cryptocurrencies, such as Bitcoin, Ethereum, Litecoin and Verge, have grown tens and hundreds times in just a few years. The Internet is full of stories about lucky people who successfully stocked up with Bitcoins or Ethereum at the right time.
Many new investors are interested in getting into the cryptocurrencies, but there are significant risks involved. The market may correct 50–70% in a matter of few days, and the ones who are not experienced enough can suffer severe losses. Therefore, it is important to understand the factors behind the course of the currency, and how this can predict the movement of prices.
It is known that the dynamics of the exchange rate is determined by the supply-and-demand. “Price takes all into account” — that is what one of the basic rules of trading says. These laws are universal for any market. But this is a generalized representation. It is necessary to identify the main criteria that influence market trends in projections for short and long-term prospects for a deeper understanding.
News
The media is one of the most effective means of manipulating the public. News feeds are able to instill panic and fear in a mass manner, as well as euphoria. Direct impact of news on the market is perfectly illustrated by the high-profile events in the world. Remember the situation with the ban of ICO by the Chinese authorities in September 2017? Panic attitude led to the collapse of the bitcoin price — from $ 5000 to $ 3000.
This factor is relevant for short-term forecasts. News differ in the nature of the sources: political and systemic. For example, the recent turmoil in January with the Chinese and South Korean exchanges led to another collapse of bitcoin and altcoins, while NEO continued to rise against the backdrop of positive news from China. This refers to political sources. Systemic sources, however, implies radical or innovative changes in the operation of one or another platform, scaling in the market.
Therefore, it is crucial not only to follow the latest developments and news in the media, but also take into account that it can be used for price manipulation.
Fear factor
Market majors/thought leaders, control the market with the help of FOMO (fear of missed opportunity) and FUD (fear, uncertainty and doubt). The activity of financial giants acts as a catalyst for jumps and falls in the price rates. Thus, they form the mood of the majority, which increase growth or decline. Enhanced “punchy” growth inspires confidence and is able to force to buy assets in a rush and unwisely. Uncertainty and fear provoke a speedy sale in the same way. A well-known investor and billionaire Warren Buffett, with $ 90 billion on his account, used to say: “Be fearful when others are greedy, and be greedy when others are fearful”.
It is really important to act independently and not always follow the crowd, especially when the market is highly overbought (if you consider buying) or oversold (in case selling is considered).
Mutual influence
Comparing the price movement of large-capped currencies, it is striking that some of the cryptocurrencies are in the same bundle. This is especially noticeable on the daily charts, when altcoins almost exactly repeat the bitcoin movement. Bitcoin serves as a support and leader of the cryptocurrency market. In some situations, funds flow from the altcoins into bitcoin, provoking its even greater growth and an even greater “drawdown” of the altcoins. But this is usually an exception, inversely proportional to the overall dynamics.
Technological progress
Speaking about the principles of the formation of market demand, one cannot ignore technological aspects. New platforms, a growing interest of investors and the deployment of detachment have a positive impact on the long-term growth of assets.
The growth of the cryptocurrency market is conditioned by the opposition to the traditional economic foundations. Striving for independence, anonymity, security and faster, cheaper transactions lays a solid foundation for the development of the cryptocurrency market. This will improve the spheres of life not only for ordinary users, but also make the business more transparent and efficient. If the legislative and regulatory situation stabilizes, then the cryptocurrency market will continue to confidently move towards a new economic system.
It is impossible to predict the result of such transformations. Too many factors and variables that affect development make it difficult to assess the results. You can expect a complete failure or an innovative breakthrough in technology and economics.
Political factor
News warns of short-term market convulsions. But acute political situations can seriously destabilize the cryptocurrency sector.
South Korea’s announcements of the closure of crypto exchanges led to a collapse in the market. But it should be kept in mind that news is often reckless and does not always reflect objective positions. Political regulation can deal a crushing blow to the market, provoking a global outflow of funds. An example of such an event is the ban on mining in China. The mining industry in this country occupies a large share in the total number of pools. Consequently, a significant amount of capital is concentrated here, which can disrupt the market balance and lead to long-term stagnation.
However, it is also important to understand that regulations can also mean positive news for market development and basically translate into market maturity and adoption. Regulations provide clarity and protection of clients’ assets, which means that more risk-averse investors as well as institutional investors can also get involved.
Economic factor
World financial instability shakes faith in fiat currency and pushes for the search for alternative ways of large investors and ordinary citizens. This also includes other economic factors, such as inflation, devaluation and dependence on emitters. At the same time, the cryptocurrency market is young and vulnerable. Strong volatility has a negative impact on the recognition of cryptocurrency as a means of payment.
Fiat money and traditional financial companies are conservative in economic dimension. Despite the development of technology and the simplification of financial transactions, many approaches have remained the same: centralized management, restrictions in conditions, complexity in conducting micro-transactions, etc. New technologies simplify the interaction of structures and users, but do not change the root principles. The cryptocurrency market combines these aspects and can transform the economic system itself at all levels.
Adoption in society
The business industry strives to implement blockchain technologies in its infrastructure, thereby widening the range of applicability of cryptocurrency as a means of investment, and for making purchases or paying for services. The ICO model has simplified the system of crowd-funding, raising it to a qualitatively new level.
Public interest will keep on growing on the condition of the stable scaling of the scope of application of the cryptocurrency. The achievement of consensus and universal recognition of the cryptocurrency as well as positive regulations developments will open up a new influx of investment, which will provide support for the further development of the sector, which in turn will trigger a new wave of interest, driving prices higher.
Internal Competition
The market is unpredictable. And the beginning of something new can foreshadow the end of something old. Speaking of cryptocurrencies, this means that the appearance of new, faster and more efficient technologies on the market will affect the demand for older ones.
Until now, bitcoin has a leading position. But the bitcoin protocol is rigidly fixed. If it is not possible to reform the protocol work, then sooner or later the network can reach a critical point. Having reached the culmination, individual cryptocurrencies may be sent to the archive, giving way to new leaders offering more efficient solutions. For example, there are already several alternatives to Ethereum providing scaling opportunities as well as solid platforms for blockchain based projects. And more of these appear each day.
Security problems and bankruptcy
System breakdowns, hacker attacks, the closure of exchanges — this refers to such things, which are difficult to track and impossible to predict. Just one mistake in the code, thanks to which many holders can lose their funds in wallets, can lead to collapse in the market.
These events cause a chain reaction leading to a general disturbance. To date, the cryptocurrency market is distinguished by a variety of exchanges, wallets and platforms. The main stream of money goes to the market through them. And a violation in the operation of one of the systems may not be critical for the whole market, as, for example, in 2014 occurred with the Mt. Gox, which accounted for about 70% of trading volume. The termination of trading led to the collapse of the market by 80%. Of course, if this happens now, then the market will fall by not more than 10–15% due to the large number of exchanges where funds are distributed.
Organized pressure on the markets
The latter factor can include several factors. A coordinated attack on the market accompanied by negative news and the spread of panic can be purposeful and planned. The market expects a “reset”. Such clashes happen so forcefully that neither bulls nor bears can hold the market.
Market majors can influence the market price, but cohesive actions are required to control a whole market the size of hundreds of billions of dollars. Just try to imagine how much money is needed to create overbought or oversold at the markets in a few hours with billions in trading volumes.
There is only one conclusion: Cryptocurrencies are decentralized, the market is not. Each participant has cryptocurrencies, but absolute power over the market is in the hands of the elite controlling the significant share of total supply. Artificial “pumping” is more like an exponential graph. The same concerns the fall (“dumping”) of the course. Namely, cryptocurrencies with small trading volumes are subject to speculation most.
Internal market factors are more applicable to the short-term period, as the market is unstable to speculation and “subversive” news, therefore, everyone considering investments into cryptocurrencies has to manage and cope short-term wild swings.
In order to analyze cryptocurrency market fundamentals, more global factors should be taken into account over the long term, such as legal and regulatory framework, scaling and recognition. As well as efficiency and perspectives when considering a specific coin/