Cryptocurrencies are some of the most popular assets in the financial industry. At their peak, digital currencies had a market cap of more than $3 trillion.
While this valuation has dropped a bit, the reality is that the industry is going mainstream, with many institutional investors investing in these coins.
In this article, we will look at some of the top things that move crypto prices.
Types of cryptocurrencies
There are several types of cryptocurrencies. Broadly, there are two main types of cryptocurrencies. First, there are coins like Bitcoin, Litecoin, Ravencoin, and Bitcoin Cash. These coins were mostly created to handle transactions and act as an alternative to the US dollar.
Second, there are crypto tokens, which are cryptocurrencies built on top of other layer-1 blockchains like Ethereum and Zilliqa. These tokens are the most in the industry and are mostly used for governance and intra-ecosystem payments.
Cryptocurrencies can also be divided into two: proof-of-work and proof-of-stake. Proof-of-work are coins like Bitcoin and Ravencoin that require mining while proof-of-stake are those that use validators to confirm transactions. Examples of proof-of-stake coins are Ethereum, Polkadot, and Cosmos.
Why cryptocurrencies are volatile
Cryptocurrencies are known for their volatility. For example, Bitcoin surged to $67,000 in 2021 and then plunged to $15,000 in 2022. In the most recent past, this volatility has eased quite a bit.
First, they are volatile because they are mostly held by retail investors. This is in contrast to stocks, which are mostly held by institutional investors like Blackrock and Vanguard. Retail traders tend to have a short-term horizon.
Second, cryptocurrencies are volatile because of their age. Digital currencies are relatively new compared to other financial assets like stocks and commodities. As a result, we can assume that they are in a price-discovery phase.
Third, they are volatile because of external factors like regulations. Countries like the United States are still wondering how to regulate these coins. Therefore, even crypto holders are concerned about how these coins will be regulated.
Regulations play an important role in the cryptocurrency industry. Therefore, in most cases, crypto prices react to regulatory news from key countries like the United States, China, and the European Union.
For example, in 2020, Ripple price nosedived sharply after the Securities and Exchange Commission (SEC) launched a lawsuit against the company. The lawsuit alleged that Ripple Labs raised money without following the right process.
Another good example is when Tornado Cash crashed after it was sanctioned by the American government. For starters, Tornado Cash is a cryptocurrency mixer that helps to promote anonymity of transactions. Regulators alleged that the coin was promoting criminal activities.
Therefore, you should always consider statements by regulators. Some of the top agencies to focus on are the SEC, Commodity Futures Trading Commission, and the Office of the Comptroller of Currency. Internationally, you should focus on agencies like the FCA, ESMA, and ASIC.
Pump and dump
A pump and dump is a situation where a single individual or a group of them conspire to push a cryptocurrency higher.
They do this by selecting thinly traded coins, buying them, and promoting them in social media platforms like Twitter and Reddit. After rising, they exit at a huge profit.
In most cases, these pump-and-dump schemes can lead to gains and losses of cryptocurrency prices.
Hacking is prevalent in the cryptocurrencies industry. The biggest hack was that of the exchange known as Mt. Gox. In this, crypto worth hundreds of millions of dollars was stolen.
Other hackings have happened too. Some years ago, cryptocurrencies worth more than $700 million has been stolen. When this happens, investors tend to sell their currencies.
This is because as in all investments, cryptocurrencies is a confidence game. For example, when a company is hacked, investors tend to sell the stock of the company.
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Statement from influential figures
In the cryptocurrencies industry, there are a number of influential figures who can move the currencies. For example, whenever Vitalik Buterin speaks, traders listen. This is because as the co-founder of the currencies, he knows a thing or two about the industry.
The same is true whenever the regulators speak. For example, when the head of the SEC speaks, traders tend to react.
Another good example of this is Elon Musk, the richest man on earth. Musk has become one of the most influential people in the cryptocurrency industry. In 2021, his tweets and statements about Dogecoin helped to propel it to become one of the biggest coins in the world.
A common factor that moves cryptocurrency prices is an upgrade or a major event within the network. For example, Ethereum price rallied towards the Merge in 2022. This merge transitioned it from a proof-of-work (PoW) to a proof-of-stake (PoS) network. It rallied by almost 50% in the weeks to that upgrade.
The same happened to Near Protocol when it was being upgraded to incorporate the sharding technology. These rallies happen because of the fear of missing out and the fact that these coins tend to generate hype before the event.
At times, monetary policy, especially from the Federal Reserve, can have an impact on cryptocurrency prices.
A hawkish Fed tends to drag cryptocurrency prices lower and vice versa. Therefore, you should always focus on the actions that the Federal Reserve does.
You should also focus on news and events that affect the Fed’s decision like inflation and employment rate.
Crypto supply and demand
The other factor that affects crypto prices is demand and supply. Most coins like Bitcoin and Litecoin have a fixed supply limit. Other proof-of-stake tokens have a fixed supply but which can be adjusted by the community.
Still, there are factors that affect demand and supply in the ecosystem. For example, PoS tokens have a concept known as burning, which reduces supply by placing tokens in a dead wallet that cannot be accessed.
Another way that affects supply is known as halving, which reduces the amount of rewards that miners receive. Most coins reach the halving stage after every four years. And in most cases, they tend to rise before the halving process.
CME and CBOE are the biggest futures exchanges in the world. Few years ago, the two companies announced that they would list Bitcoin futures.
This was a positive move for the cryptocurrency because many traders expected the institutional investors with more money to enter the business. This led to higher prices.
However, reports continue to show that the demand from the investors is not very high.
New exchange listings
For new cryptocurrencies, being listed in a major exchange like Binance, Kraken, and Coinbase is a big deal. Therefore, these coins tend to rally after this happens.
Many investors and traders see such a listing as a stamp of approval. As a result, the coin tends to rise sharply after listing although that bounce is usually not all that long-lasting.
External useful resources
- What Moves Bitcoin’s Price? Plus500