Why Is The Crypto Market So Wild? Factors That Move The Crypto Market.
Cryptocurrency is the Wild West of investments. Even though cryptocurrencies are traded like stocks on the stock market, the crypto market is not comparable to the Dow Jones, Nasdaq, or S&P 500.
Investors’ biggest concern over time has been why crypto asset prices are so unpredictable? According to some experts, cryptocurrency markets thrive on speculation, contributing to the market’s volatility. To profit, investors place bets on whether prices will rise or fall. High volatility is caused by these speculative bets, which generate a quick infusion of money or a sudden outflow. For this reason, purchasing cryptocurrency is like hopping on an endless roller coaster. You could be in for a wild ride with the crypto coin, for all you know.
See also: Decentralized Finance (DeFi) vs Centralized Finance (CeFi).
Volatility Defined
Changes in the price of an asset is known as volatility in the financial markets. It can be a good thing if the price rises or falls steadily within a certain range.
However, extreme price movements in either direction can also occur.
In a market, healthy volatility serves a variety of objectives, but the most important one is that it offers profit chances. For example, stock price movements allow traders to purchase cheap and sell high, or “short,” a stock they believe will fall in price.
When an asset’s price fluctuates dramatically in a short period, it is considered to be extremely volatile. Cryptocurrency markets experience extreme volatility.
Volatility in the cryptocurrency market is out of this world. As of now, there are no indices to track the volatility of cryptocurrency values, but a cursory look at price charts shows that crypto prices fluctuate more rapidly and dramatically than the prices of traditional market assets.
According to CoinMarketCap, the price of Bitcoin surged 125 percent in 2016, then more than 2,000 percent in 2017. A year after its all-time high in 2017, bitcoin’s price fell again. In 2021, bitcoin’s price tripled from its 2017 bull run peak, setting new all-time highs. Bitcoin’s value hasn’t increased significantly since 2022. Instead, it has dropped by over 50%.
The prices of cryptocurrencies are influenced by factors that do not exist in other markets. If you want to make money with cryptocurrencies, you must understand what causes their price to rise and fall.
How The Cryptocurrency Market Works
Like any other market, the cryptocurrency market is where cryptocurrencies are bought and sold. The demand and supply of a specific cryptocurrency on a particular market will determine the direction of its price movement, whether it be upwards or downwards.
Unlike the stock market, there are centralized (CEX) and decentralized (DEX) cryptocurrency trading exchanges. It is essential to understand this, as the price is determined differently in each type of exchange.
How are cryptocurrency prices are determined on centralized and decentralized crypto exchanges?
A centralized crypto exchange is run by an intermediary which safeguards assets and facilitates transactions; the exchange serves as a conduit for market players. Typically, transactions here are settled on the exchange’s centralized server.
To ensure that their operations are legal, centralized exchanges are also (usually) subject to financial authority regulation, including KYC and AML rules.
On the other hand, a decentralized cryptocurrency exchange runs without the need for a central authority since it is built on smart contracts. Decentralized exchanges are permissionless, meaning anyone can join without the exchange’s consent. Consequently, decentralized exchanges are not subject to KYC or AML laws.
On centralized crypto exchanges, the price of a crypto asset is determined between two parties using the traditional order book model employed by conventional exchanges such as the S&P 500.
Order books are a listing of all open buy and sell orders for a specific cryptocurrency. In this model, the CEX acts as a middleman to clear trading transactions and provides custody services for your crypto assets. Instead of directly on the blockchain, trades occur on the server of the CEX.
By volume, Binance is the leading centralized exchange.
How do decentralized exchanges determine the price of cryptocurrencies?
On decentralized exchanges (DEXs), peer-to-peer trading occurs through automated smart contracts (programs) that execute trades without intermediaries.
DEXs determine cryptocurrency prices via liquidity pool protocols. These exchanges facilitate transactions or “swaps” between users instantly and directly from wallet to wallet. Unlike CEX, there is no intermediary.
Usually, an automated market maker (AMM) approach is utilized to execute swaps. AMMs eliminate the need for counterparties to establish the price. Instead, AMMs use algorithms to determine the price, which means that you can trade a specific coin or token regardless of whether there is another party to the trade. This is made possible through “liquidity pools.” These pools pay users to keep a portion of their funds in a smart contract, which can then be withdrawn for trades to occur.
There are only buyers looking to trade a particular cryptocurrency pair.
DEXs are non-custodial, so you are responsible for safeguarding your cryptocurrency.
By utilizing a hardware wallet and seed phrase recovery wallet, you can safeguard your cryptocurrency while trading on a decentralized exchange. A popular hardware wallet is the Ledger Nano.
UniSwap and Pancakeswap are the two largest cryptocurrency DEXs at the moment.
Factors That Influence The cryptocurrency Market.
What motivates people to buy and sell assets in different markets is a complex topic of debate. People are susceptible to being influenced by market sentiment, news, circumstances, market analytics, trading signals, etc. The factors that account for movement in the crypto market include:
1. The Price of Bitcoin
Bitcoin is the king of cryptocurrencies, and its price movement in both directions moves the rest of the market. In other words, Bitcoin movement affects the price of other cryptocurrencies.
2. Fundamental News
The crypto market is highly sensitive to news. It is common for project news and development milestones to cause the price of a cryptocurrency to rise or fall. Generally, the announcement of a hardfork, testnet, or mainnet release will significantly impact the price of any cryptocurrencies. In many instances, the price of a coin will increase before the project’s testnet or mainnet release date and then decline just before the testnet or mainnet release.
Similarly, the price of a coin will decrease if a published milestone is missed, the project is hacked, the development fails, or exploited in any way.
Coin Market Cap is an excellent resource for determining if there are any upcoming project announcements for a specific coin or token.
3. Airdrops
Airdrops are a type of promotional event used in the cryptocurrency industry to increase exposure for a particular project or coin. Typically, they consist of the project team sending free coins to the wallets of existing coin holders. Therefore, it is essentially a cash giveaway to reward project supporters. When this occurs, the price of a specific coin may undergo a nuclear price explosion.
4. Token Burn
A token burn is a process of intentionally destroying or ‘burning’ coins to render them unusable, reduce the total market supply of that coin, and increase its value. It is the equivalent of a stock buyback in traditional markets on the cryptocurrency market. Coin burns are used to stabilize the value of a coin and are frequently scheduled in advance as an incentive for buyers to hold the coin (and benefit from price rises when coin burn occurs).
5.Pump-and-dump groups
Pump-and-dump schemes are not unique to cryptocurrencies, but they are a fairly prevalent method of manipulating prices. Be wary of pump-and-dump schemes. They roughly follow this format: Usually, on Telegram or other social platforms such as Discord, WhatsApp, Twitter, and Facebook, a group of investors (organizers) collude to buy a low-cap coin gradually overtime to drive up the price. After persuading other investors that it will skyrocket in value, the organizers sell, causing an immediate price drop. It’s survival of the fittest between the organized and the disorganized.
Conclusion
This list is non-exhaustive. Ultimately, despite various factors, the value of cryptocurrency is determined by supply and demand, just like anything else.
Demand increases as a cryptocurrency’s visibility or utility grows. Additionally, the broader adoption of cryptocurrency around the world increases demand. For instance, when institutional investors began purchasing and holding Bitcoin at the beginning of 2021, the price of Bitcoin increased dramatically as demand outpaced the rate at which new coins were created, effectively reducing the total supply of Bitcoin.
Similarly, the demand for Ether increases as more decentralized finance (DeFi) projects are launched on the Ethereum blockchain. This is because Ether is required to conduct transactions on the blockchain, regardless of the cryptocurrency being utilized.
