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As a notoriously volatile landscape, there’s a tremendous opportunity to make (or lose) a lot of money in the crypto market. Wouldn’t it be nice if we knew where prices were going to move in advance?
While there’s no crystal-ball method to predicting these sorts of things, cryptocurrency prices are far from random. However, we can make generic forecasts about where a coin is headed by paying attention to critical variables. Besides day-trading, this can even help long-term investors determine which cryptos to buy and at what time.
This article will cover some of the greatest influencers on crypto market prices. As a primer, we need to address why cryptocurrencies fluctuate so wildly in the first place.
Volatility and Trust in the Crypto Market
Volatility in cryptocurrency dates back to its inception. Bitcoin never meant to operate as a “stock” or “share.” Stocks imply the existence of a centralized company, which violates Bitcoin’s ethos. They also suggest the expectation of profits, which an investor’s initial liquidity should generate by spurring business growth.
Bitcoin featured no established business or marketing team responsible for promoting it or granting it ‘legitimacy.’ Furthermore, Bitcoin buyers get precisely what they pay for it: Bitcoin. It is not a token representing a percentage of profit from a company generating revenue through other means.
Instead, Bitcoin was designed as a “peer-to-peer electronic cash system” whose value as money is implicit in the coin itself. Thus, it is valuable so long as other people choose to trust it – which its properties of scarcity and decentralization give credence to.
However, mere trust isn’t the most reliable metric when it comes to value. Trust is fleeting and tends to multiply as more people gain or lose it for an asset. This multiplier then reflects itself in the price of Bitcoin, which can crash as much as 50% in a day.
So what about the rest of the market? As the dominant crypto, Bitcoin’s culture of price and speculation affects sentiment across the rest of the market. For example, Bitcoin fell below $60 000 earlier today, and every other cryptocurrency has been down since.
Predictable Variables Affecting Price
Though speculation plays a significant role, it’s not all emotion in the crypto markets: Here are some of the more predictable and traditional reasons why prices may rise or fall on a given day.
Supply and Demand
The old economic truism applies to crypto markets: Supply and demand determine a product’s price. Thus, price falls as supply rises, and price rises as demand rise.
One of the great drivers of Bitcoin’s price accumulation is a manipulation of this law. Bitcoin’s inflation rate reduces by 50% every four years by design. That means a diminishing number of Bitcoin is available on the market amid otherwise constant demand. These supply shocks have reliably led to massive price accumulation for Bitcoin and other cryptos, including this year.
A famous Twitter analyst named “Plan B” has used supply and demand to predict Bitcoin’s future prices with remarkable accuracy. Using a model known as “stock to flow,” he measures the circulating supply of Bitcoin against its incoming units to forecast its price. So far, he’s correctly predicted the month-end Bitcoin price for August, September, and October 2021.
News Of The Day
Traders would do well to pay attention to the headlines. Bitcoin and cryptocurrencies regularly see drastic fluctuations in price and trading volume in reaction to daily news.
Elon Musk presents the foremost example of this phenomenon. When the multi-billionaire announced that his company bought $1.5 billion in Bitcoin this February, the cryptocurrency’s price pumped immediately. Then, when he withdrew acceptance of Bitcoin payments for Tesla cars in May, the price crashed shortly afterwards.
The May crash may have also been related to China’s announcement that it would ban cryptocurrency mining in the country. Either way, Bitcoin was reacting to the news of that month.
A most recent example came last week after the US inflation numbers for October became public. Following the highest annual inflation in 30 years, Bitcoin pumped to a new all-time high at $69 000 dollars.
Government regulation is unfortunate for crypto bulls, as it can often intervene with an otherwise thriving cryptocurrency market. The China mining ban above comes to mind, which the market followed with a 50% correction.
However, the direct effect of the regulations matters, too, alongside their impact on market sentiment. For example, China’s ban caused the Bitcoin network’s hash rate to reduce by 50%. This effectively halved the cost of Bitcoin “production” over a few weeks. Therefore, miners could sell their Bitcoin onto the market for a consistently lower price and maintain business.
In the United States, the SEC remains firmly opposed to permitting a Bitcoin spot ETF to reach the market. This serves as another impediment to price. Most crypto-experts agree that the approval of a spot ETF would allow billions of dollars to flow into cryptocurrencies. This is another example of regulations slowing down crypto adoption.
Several technical factors influence the price of cryptocurrencies, but these simple variables explain quite a lot on their own. Keeping up with daily news and regulations can help traders and investors spot crypto market opportunities. Furthermore, following analysts like Plan B can be great for learning other valuable and technical metrics that move digital asset prices.