Cryptocurrency prices are notoriously volatile. Anyone who has invested in this space for more than a few months has seen the potential for sudden crashes as well as for investment success. This goes for coins at the top of the market, like Bitcoin and Ethereum, all the way down to the unknown projects thousands of places down the rankings.
Among unpopular cryptocurrencies, prices change for fairly simple reasons. Most of these projects lack significant marketing and are traded by very small international communities. Coins sell for what people think they are worth. If the blockchain behind the coin develops in impressive ways, the price goes up. If development lags, the price falls.
When we get higher up the crypto charts, prices change according to much more complex factors. Let’s take a look at each of these factors individually so that you can make better trading decisions.
1. Product/Software/Technology Updates
Cryptocurrencies are based on blockchain software. And blockchain software can be amended and improved to create better cryptocurrencies/tokens. Bitcoin has been vastly improved by innovations like Segregated Witness and the Lightning Network. When and if Ethereum implements Proof-of-Stake or Sharding, this will motivate people to buy Ethereum at higher prices. Ripple’s numerous product successes and announcements (such as the popularity of xRapid) have caused XRP’s price to jump numerous times over its history.
In a perfect world, product improvements would have the most weight in crypto price changes. People who consider the software above all else say they’re “in it for the technology” or “focused on the fundamentals”. In the end, good software will win the race, so pay close attention to the technology beneath your favorite crypto. This will have the greatest influence on price – eventually.
Cryptocurrency is a hot topic on online media outlets like Twitter and YouTube. Numerous personalities have emerged within these platforms. Some of them analyze crypto-trends and technologies. Others do a lot of talking without adding much to the conversation. There are also those who try to fleece the market with scams.
Crypto personalities closely tied to high quality projects, like Ethereum’s Vitalik Buterin and NEO’s Da Hongfei, can move the needle on cryptocurrency prices when they make important announcements about the project represent, or important observations about other industry trends. Talking heads from outside the crypto industry, like crypto critic Nouriel “Dr. Doom” Roubini or Crypto Clown Prince John McAfee can also affect prices for good or ill, but their influence was at its height in 2017 and is lower today.
When crypto markets are falling, influencers like these tend not to make much of a difference. When crypto prices are rising fast, investors are spending money emotionally for FOMO (fear of missing out), and influencers can add fuel to the fire.
3. Scandals/Scams/Whales/Market Manipulation
Throughout most of the Crypto Winter that extended from early 2018 well into 2019, numerous market manipulation tactics were used to make money for powerful industry figures, even as market prices were stagnant or falling.
“Whales” are people or entities which own or can buy Bitcoin or altcoins in huge quantities. Simply by using their wealth to buy up large amounts of a cryptocurrency, they can move up the price (by removing high amounts from the circulating supply, increasing demand/price). They can also cause a crypto price to fall precipitously by selling large amounts suddenly (flooding the market and driving down the price because there’s more coin available than anyone wants).
These events happen frequently in these markets. The problem is particularly acute for small coins. A single “whale” can buy or sell huge percentages of a small altcoin’s circulating supply, singlehandedly moving the price significantly.
Similarly, scandals and scams change crypto prices quickly. The news that the New York Attorney General had sued Tether in April 2019 made crypto prices tumble immediately. The collapse of Bitconnect in January 2018 was one of the events that depressed investor sentiment before the 2018 bear market began in earnest.
A major factor in crypto prices not yet discussed is the policy of national regulators. When China banned crypto exchanges in 2017, this created huge ripples through the international markets. On the other side of the coin, lack of concrete regulations in markets like the United States has frequently had a stunting effect on crypto prices. In this latter case, investors worry that the Securities and Exchange Commission or some other agency could rule against cryptocurrencies, restricting their operations or changing the way investments are taxed to the detriment of markets and investors.
Cryptocurrency companies usually don’t have much control over what governments do. But since the SEC has now prosecuted numerous ICO scammers, it’s clear that blockchain projects have to abide by federal wishes. A good or bad ruling from the Feds in major crypto markets like the US, UK, South Korea, China, and Japan can throw the markets into red or green territory very quickly.
In the end, the most valuable cryptocurrencies will be the ones that are the most useful and successful. But while we wait to see who will make the climb into longterm mainstream success, many cryptocurrencies will rise and fall. Oftentimes, they will do so for reasons that don’t pertain to their inherent quality.
Learn to understand the influences that contribute to cryptocurrency value. If you’re confident that a coin is great, don’t worry so much about the effect of factors like social media influencers and short term scandals. Of the four price controls we talked about, numbers 1 and 4 are the most significant for long term value. Invest accordingly, and you might see excellent returns despite short term fluctuations in diverse market environments.
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