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May 10, 2018
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As of this writing, a combination of factors has dragged the cryptocurrency market, leaving all major digital assets on a nosedive. One of the most probable causes for the decline is the withdrawal of the U.S. from Iran nuclear agreement. All the same, this is just one of the several factors that affect the market.
Even in the face of volatility, the cryptocurrency market continues to draw the attention of both traders and investors, as its popularity grows in equal measure. Mainstream digital currencies such as Bitcoin, Ethereum, and Litecoin have witnessed tremendous growth in just a few years. Those who stocked up their accounts with Ethereum or Bitcoin at the right time have become successful investors.
Testing the waters
Many upcoming investors would like to test the waters of cryptocurrency investing, even amidst significant risks involved. In only a short time, as short as hours or days, the market may correct to 50 or 70 percent, leaving inexperienced traders with brutal losses. For that reason, it is important to understand the factors that define the behavior of the cryptocurrency market. This could help you predict the movement of asset prices.
In a universal market, the law of supply-and-demand determines the mechanics of the exchange rate. One of the basic rules of trading is “Price takes all into account.” However, these laws are applicable to any market and often provide a general picture of the market. To get a clearer picture of the cryptocurrency market, investors need to identify the main factors that determine market trends both in the long-term and short-term perspectives.
#1. News
The withdrawal of the U.S. from Iran’s nuclear agreement is one of the current affairs hitting the headlines as of this writing. As noted earlier in this piece, this might have had a negative impact on the crypto market, leaving nearly all the established cryptocurrencies with a drop in value.
The media plays an important role in manipulating public perception. News feeds can easily instill panic and excitement by a greater magnitude. High profile events across the world can determine the way cryptocurrency market behaves. For instance, when the Chinese authorities banned ICOs in September 2017, the panic led to a serious drop in the price of Bitcoin from $5000 to $3000.
The news factor mainly affects short-term trading forecasts. In addition, news varies depending on the source—it can be political or systemic. For example, at the beginning of the year, the confusion between Chinese and South Korean exchanges affected bitcoin and other altcoins, but NEO remained strong following positive news from China. This example shows the impact of news from a political angle. On the other hand, the impact of systemic news results from radical changes in operation on one or more platforms and market scaling.
With this in mind, it is advisable to follow news in the media, taking into account that it can easily manipulate prices in the cryptocurrency market.
#2. Fear
Cryptocurrency market influencers and thought leaders can command the market through Fear Of Missed Opportunity (FOMO). Similarly, they can cause the market to take a particular direction based on Fear, Uncertainty, and Doubt (FUD). The activity of crypto influencers serves as the mechanism for rises and falls of prices.
The influencers represent the mood of the majority, which affect the market in a positive or negative angle. Improved market growth instills confidence in the investors and traders, which often results in unwise buying of assets. On the other hand, uncertainty and fear often result in a speedy sale. In the words of prominent crypto investor and billionaire Warren Buffett, “Be fearful when others are greedy, and be greedy when others are fearful.”
Equally important is the ability to act independently and not follow the crowd. This is important especially when you consider buying or selling of digital assets.
#3. Mutual influence
When you compare the price trends of cryptocurrencies with large market capitalization, you can discover that some of the digital categories fall in the same bundle. This is often witnessed on daily trading charts, in which altcoins nearly repeat bitcoin movement. Bitcoin still dominates the cryptocurrency market. In some circumstances, funds move from altcoins into bitcoin, which leads to a greater growth and even a drawdown of the altcoins. However, such cases are quite rare.
#4. Technology
When it comes to common forces that shape market demand, you cannot wish away the aspect of technological advancements. New platforms unveiled such as trading via the mobile handsets, often come with a new wave of interest that might affect the cryptocurrency market. Similarly, deployment of detachment and a growing investor interest have long-term influence on the growth of crypto assets.
In addition, the opposition to the universal economic foundations may condition the growth of the crypto market. As platforms strive for independence, anonymity, faster and cheaper transactions, as well as security, the market tilts towards a certain angle as the prevailing technology dictates. Technology usually improves the respective platforms by making them more efficient and transparent. In addition, stable legislative and regulatory systems can have a positive influence on the cryptocurrency market.
All the same, it is nearly impossible to predict the result of technological progress. This follows the involvement of several factors that eventually affect growth and make it difficult to evaluate the results. Such transformations could lead to a serious failure or an innovative progress.
#5. Politics
Unlike news, which may affect the cryptocurrency market in the short term, politics has a long-term effect on the market. When South Korea declared all crypto exchanges closed, the cryptocurrency market collapsed. However, the news may not necessarily reflect the objective positions.
On the other hand, political regulations can impose a serious blow to the market, which could result in a worldwide outflow of funds. A case in point is China’s ban on crypto mining, which occupies a large share in terms of pools. In that situation, a large amount of capital is concentrated in the industry and such declarations can lead to long-term stagnation of the market.
Similarly, political regulations can bring positive news to the market, leading to maturity and adoption. Regulations can lead to clear policies on asset protection, which can eventually draw more investors to the market.
#6. Economics
Economic instability can have a ripple effect in financial markets, as both investors and ordinary citizens lose faith in fiat currency and look for alternatives. Other economic factors that can disrupt the cryptocurrency market include currency devaluation, inflation, and reliance on emitters. In addition, the crypto market is still in its infancy stage, in which a strong volatility could impact negatively on the recognition and value of cryptocurrencies as a means of payment.
It is equally important to note that traditional financial companies, as well as fiat money are often conservative in terms of economic dimension. Even with improved technology and simplified financial transactions, their approaches remain decentralized and restricted. Besides, processing of micro-transactions is often complex or non-existent in such platforms.
Advanced technologies can only simplify processes but do not change the original principles. Cryptocurrency market takes in to account all these aspects to disrupt the economic system at all levels.
#7. Societal adoption
The cryptocurrency market thrives on the blockchain technology, which seeks to widen the scope of applicability of digital currencies as a means of trade and investment. The inclusion of ICO as a fundraising model has taken the whole concept to a new level.
However, the success of blockchain technology hinges on public interest. The global community looks at the stability and scope of application of the technology. If the concept of cryptocurrency achieves consensus and universal recognition, it leads to positive regulations that open up opportunities for market growth. The sector will experience support for further development, which eventually triggers public interest, and leads to higher prices.
#8. Internal competition
The cryptocurrency market remains unpredictable. The beginning of a new concept can foretell the end of a previous one. For example, when fresh, faster and efficient technologies invade the crypto market, the demand for the older concepts decreases. Let’s take, for instance, bitcoin.
Currently, bitcoin dominates the market, albeit with a rigidly fixed protocol. If the cryptocurrency retains its protocol then eventually the network could hit a critical point. In that situation, some cryptocurrencies may phase out to give way fresh market leaders with better and more efficient solutions. Ethereum network already has alternatives with better scaling opportunities and stable platforms for blockchain-based projects. What’s more, such alternatives join the market nearly every day.
#9. Bankruptcy and security issues
Another important factor that influences the cryptocurrency market is security. When a system breaks down, experiences hacking, or an exchange closes down, the market is likely to take a certain direction based on the effects of such occurrences. Unfortunately, such happenings are beyond prediction. A single mistake in the code could lead to loss of funds in digital wallets and eventually cripple the market.
Besides, such events can a reaction in the blockchain, leading to overall market disturbance. In its current state, the cryptocurrency market embraces a number of exchanges, digital wallets, and platforms, which serve as the mainstream that money follows to the market. A breach in the operation of a subsidiary system may affect the market by a significant percentage, as happened during Mt. Gox closure in 2014. However, with various exchanges in the crypto market as of this writing, the effect could be minimal.
#10. Organized market pressure
Market pressure includes a number of factors such as negative news or coordinated attacks on the market. These could spread panic among traders and investors, which could be purposeful and planned. In such circumstances, the market needs a “reset” and such disruptions occur forcefully that neither the bulls nor the bears can control.
While influencers could affect the market price, it requires a combined effort to manage the entire cryptocurrency market worth hundreds of billions of dollars. You can see the picture if you imagine the amount of money required to generate an overbought or oversold in the crypto market in just a few hours.
The cryptocurrency market operates on decentralized digital assets. However, the market itself is not decentralized. While each participant in the market owns at least some cryptocurrencies, the supreme power of the crypto market lies with the crypto influencers and elite traders that control the biggest share of the total market supply.
When it comes to internal market factors, they are more relevant to the short-term. This is because as the market becomes unstable following speculative and subversive news, crypto investors have to deal with the short-term wild swings.
Final thoughts
The fact remains that cryptocurrency market is volatile. However, to evaluate the market fundamentals, it is advisable to consider additional global factors with long-term implications. Such factors include regulatory framework, legal issues, scaling, and recognition.
Which other hidden factors can you add to this list? Join the conversation over at Telegram (https://t.me/coinstaker)
Images courtesy of Google and CoinSataker Library
Author info
Tony is a writer for the crypto space. He presents cryptocurrency and blockchain topics to the public in a way that he only can. While carefully researched, this article should not be taken as an express investment guide. Do your own research and consult a financial advisor before you invest in cryptocurrency.
