Let us analyze the factors that affect the prices of crypto currencies
What affects the quotes of crypto currencies: events, fundamental factors, psychology of traders. Forecast of the rate is for the nearest future and how to earn on it.
Unlike in 2017, since January 2018, the capitalization of the crypto currency market shows strong volatility. In January, capitalization reached its historic high, rising above $ 820 billion, but within a few weeks it fell below 400 billion. There is no single reason for this, all the factors affected investors who, in a wave of panic, started selling assets. Now the market is in the range of 250-500 billion and at any moment can break through any of these levels. What can affect the rates of crypto currencies? Read in this review.
6 factors affecting the rates of crypto currencies
Since early 2018, the capitalization of the crypto currency market has been a roller coaster to put it mildly. A strong upward trend in 2017, after which optimists predicted a rise in the Bitcoin rate to $ 50,000 and above, suddenly found the ceiling at a mark just above $ 850 billion even without reaching a psychological mark of 1 trillion, and collapsed. The fall by more than 2.5 times hurt the category of investors referred to as hamsters. Lovers of free cheese thought they could easily make money on an ever-growing rate and suffered enormous losses. In professional circles, the drawdown was regarded as local, as they thought it was a successful attempt by big business to cut out the hamsters. They even predicted that the spring will see a new take-off "to the moon". However, by the beginning of summer, the rate was barely able to break the $ 450 billion mark and fell down again. .
This whole situation showed clearly that no one really knows why the rate of the crypto currency moves in one direction or another. It comes to absurd situations when the rate first collapses or sharply flies up, and only then analysts find reasons for it in hindsight. Even now, there is no accurate explanation for why the market capitalization suddenly fell (i.e. there was a drop in all, without exception, crypto currencies) in January 2018. There are many reasons, but maybe all these reasons should be considered together? I will talk about the main factors influencing the capitalization of the crypto currency market in this review.
Factors that affect crypto currencies
Despite the fact that it has been more than 3 months, there is no consensus as to why the market capitalization fell from 850 to 400 billion dollars on January 7 to 17. Therefore, I will start with the most curious opinions:
- One of the leading analytical publications in Russia released an article in late January that blamed the collapse of the crypto currency market on January 7 on the 100 billion capitalization of the 31-year-old programmer Brandon Chez, creator of the CoinMarketCap website. According to the publication, on January 7 Chez unilaterally decided to exclude from the website's algorithms the data on the South Korean exchange trade. In the opinion of someone from his entourage, these exchanges overvalued the rate of BTC, which distorted the overall statistics. The view that Chaz is partly to blame for the collapse was also shared by Mati Greenspan, an analyst with the eToro platform.
- An equally curious idea is the one that blames the collapse on the Chinese. According to one version, on the eve of the Chinese New Year, the Chinese were selling the crypto currency to buy gifts.
There are other, more logical views on the causes of the fall of the market. Someone names the sale of coins by the manager of Mt.Gox, someone thinks that the reason is in the hack of Coincheck (although it became known after the collapse), and someone even saw a shady conspiracy of big capital, which decided not to reach 1 trillion and sold the coins at the high. By the way, a new drawdown of the first decade of June, when the capitalization fell below $ 300 billion, is associated with the hack of the Japanese exchange Coinrail, where the losses were about $ 40 million. Given that the exchange is not included in the TOP-100, the version is doubtful.
What affects the crypto currency price
1. Psychological factor. As practice shows, it is the psychological factor that is most influential. News can act as a catalyst, but it is mass panic that results from the growth or decline of the market. Investors can be divided into three groups: large capital, which actually controls the market due to the volumes of trade turnover; smart investors who are building their strategy, and hamsters who experience euphoria from the growth of the rate ("easy money"). It's enough to push a little and the money of the hamsters pour into the crypto currency market. And there are quite a few reasons to sow panic among the hamsters.
Fun fact: the price drops most actively on the news from regulators about potential restrictions of the trade. But such news has appeared with an enviable regularity for years now, and the market still recovers and goes up. One could already get used to the fact that no restrictions have a significant effect on the blockchain. Therefore, it would be logical to assume that the a push towards growth or decline is done by the big capital. And hamsters act on their own greed or panic. Read more on the psychology of crypto currency trading in this article.
2. Decisions of regulators in respect of crypto currencies mainly the regulators of Japan, South Korea, and the USA). The policy of regulators often puts investors at a deadlock. For example, at the end of last year the SEC (US Securities Commission) allowed the launch of futures for BTC on IOE and CME. At the beginning of June 2018, information appeared that the SEC was about to allow the creation of the first ETF fund for the BTC. It would seem to be a sign of loyalty. But on the other hand, a number of restrictions in advertising crypto currencies (read more here), and court decisions on the disclosure of information about the owners of purses by the stock exchanges indicate the opposite.
The same situation is with the regulators of Japan. The initial course on liberalization of the crypto currencies eventually turned into a ban on the circulation of anonymous coins after the hack of Coincheck, although those happened before. Read more about the Japanese regulator here.
And finally, the crypto currencies are not welcome in the EU, where the relevant directive was adopted in May. After the document finally comes into force, financial intelligence units will have full access to information that will identify the owners of purses. And the EU authorities themselves will have the opportunity to monitor transactions on stock exchanges. True, only about 30% of accounts are associated with the real names of the owners, and the period of bringing the legislation of the EU countries in accordance with the directive is 18 months.
3. Actions of large investors. The market is driven by the economic law of the equilibrium of supply and demand: when demand is higher than supply - the price is growing. When it is lower – the price is declining. It seems logical, but the market can be manipulated:
- In 2017, when the rate of BTC was at around $ 5,000. USA, a number of US politicians criticized the crypto currency, dropping the rate to $ 3000. This did not stop them from buying up the crypto currency at a low and somewhat changing the rhetoric. Another vivid example is George Soros. In January 2018, he openly called the BTC a typical financial bubble ("Crypto currency is speculation, which is always based on misunderstanding"). After the BTC lost 41% by April, he changed his mind sharply. And starting May, the New York branch of Soros Fund Management (manages $ 26 billion) had permission to trade in crypto currencies.
- Large-scale capital can earn on the pumps of individual crypto currencies, the value of which is a few cents. Read on how to swing the market with a Telegram channel and large capital in this article.
- Mt.Gox. This is worth a separate paragraph. The potential appearance on the market of 200,000 BTC and BCH thanks to the manager Kobayashi will make a splash. A quarter of the amount has already been sold, the BTC rate fell from 20 thousand dollars to the current less than 7 thousand. Kobayashi himself denies the influence of his actions on the market, although there is no sense in denying the laws of the economy. Read more about Kobayashi's actions and their consequences in this review.
By the way, on January 10, 2018, Warren Buffett expressed the opinion that the crypto currency market is doomed. On January 17, the first futures contracts ended, and people began to sell BTCs quickly. Here are two more reasons that could finish off the crypto currencies during the January fall.
The fact that as of today, the crypto currency holds a large investor's capital can give hope that it’s not all that bad. In other words, the market is unlikely to sink lower than the current bottom (in the first picture of the survey, the lower level of 250 billion is clearly visible).
4. Bankruptcies and hacks of crypto currency exchanges. Despite the fact that this factor should seem to be one of the most influential ones, it is not. Even with the largest break-in Coincheck, the drawdown was insignificant compared to other failures (read more on the impact of hacks of exchanges with graphic examples in this article). There are several reasons for this:
- The amount of stolen money is not so big in comparison with the total capitalization. In addition, not all hacks are successful and can partly be compensated by exchanges.
- Psychological factor. Many investors believe that hacks will not affect them and continue to trust crypto currencies. Hacking is an unavoidable risk factor, which investors agree to automatically. And this risk is not a reason to refuse to make money in a fast-growing market.
Investors are able to determine the start of potential problems at stock exchanges in advance (this is largely facilitated by communication at specialized forums), so they manage to move to other exchanges. The losses on hacks are already priced into the trading strategy.
5. Forks and other reorganizations (it has a local impact on a certain crypto currency). Investors react to any changes and news from the developers quite actively. True, not always with growth in demand. It is interesting that the same news can have a different effect for different crypto currencies. In previous articles, I have already given an example that the BTC fork in August was generally welcomed positively, and one of ETN - negatively. The reaction of investors is understandable: the consequences of forks are not clear. Although recently there are so many that the fear of cardinal changes has already passed and often forks are perceived positively.
The most significant news:
- new large participants joining the system;
- report on the implementation of the plans foreseen by the road map;
- information on any significant successes showing the results of development.
6. Interest of miners to the crypto currency. One of the few advantages of the PoW algorithm in comparison with PoS (more about them here) is is the need for energy costs, which is the cost of the coin. If the price falls, the miners switch to direct purchases, pushing up the rate and returning it to the profitable mining zone. According to the Fundstrat Global Advisors analyst Tom Lee, the cost of mining the BTC is about 6000 dollars, which is partly confirmed by the screen below (data for February 2018).
Tom Lee sincerely believes that the miners will not allow the BTC to fall below $ 6,000. Although it's not clear how they can withstand the pressure from institutional investors dropping coins.
With the advent of new algorithms, the mining of individual crypto currencies is becoming more popular, and the more people are involved in it, the more interest there is in the coins. Theoretically, the growth in the number of miners should knock down the rate, but in practice this only fuels curiosity. If the BTC is practically unprofitable to mine because of the need to use ASIC equipment, the coins of a lower echelon are quite attractive. Example: Siacoin or Decred and Ethereum (dual mining).
Conclusion. I think many more reasons can be added to this list, but the above factors are the main ones. Alas, most of them now play out of favor with the crypto currency market, which means there is no reason for optimism. At least, I do not believe that in the near future one of the regulators will make a significant easing or there is a serious fundamental factor that can spark a new confidence in crypto currency in the hearts of the hamsters. And this means that soon the ICOs decline, and the market will be cleansed from "junk crypto currencies" as it was with dotcoms in 2000.
How investors can use it for their own purposes:
- do not expect that the capitalization of the crypto currencies will go up in the near future. This is possible only if the crypto currency market is supported by regulators and large capital;
- closely monitor the leading crypto information resources: CoinMarketCap (coinmarketcap.com), Forklog (forklog.com), bitcointalk.org forum;
- don’t panic and don’t believe everything on forums or what certain famous people may have allegedly said.
At the time, the trend oo the crypto currency market is more bearish. And the only simple alternative is to open short positions for the main currency pairs on Forex. With rare exceptions, crypto currency exchanges do not provide for earnings on the fall of the exchange rate, so Forex is the only optimal option. If you have a different opinion as to what else can influence the quotes, I invite you to discuss it in the comments.
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