How the News Affects Crypto and Traditional Asset Prices
When investing in any asset class, the price movements experienced by that asset is of particular interest to the investor. This price movement or volatility is a determining factor of the level of profits or losses that will be incurred over time by the investor. Volatility is a major part of any investment risk management strategy. The investment market does not exist in isolation. Events and occurrences around the world often time have a profound impact on the stability of the market. From the great depression of the late ‘20s and early ’30s to the financial crisis of 2008 and everything in between and beyond, the news has continued to affect the prices of tradable assets.
The emergence of bitcoin and the creation of the cryptocurrency market has introduced another asset class to a market that was traditionally dominated by shares, bonds, stocks, and sundry debt instruments. Nowadays, the cryptocurrency market seems to be front and centre of the agenda as far as the financial market is concerned. While there exists a number of stark contrasts between the cryptocurrencies and traditional asset classes, the former is still a tradable asset that is affected by market dynamics which lead to price volatility. The entire record of the history of the crypto market, albeit short, is consistent with the notion that events in the news always have a profound impact on the market. As a result, a watchful observance of news trends forms a key part of the strategy building activity of most participants in the capital market.
China’s ICO Ban and South Korea’s Crypto Regulations
In September of 2017, the Chinese government placed a blanket ban on all ICOs in the country. The government also prohibited all local cryptocurrency exchange platforms from offering their services within the country. Within hours of the news filtering out into the public sphere, the price of bitcoin and other cryptos fell considerably. With local cryptocurrency exchange platforms in China unable to operate, the global trading volume for many cryptocurrencies also fell dramatically. Traders and brokers alike were left in limbo as many platforms struggled to move their operations elsewhere. Binance, for example, one of the largest cryptocurrency exchange platforms and a relatively new one at that point had most of its customers in China.
This was arguably the first large-scale event that would have a profound albeit short-lived effect on the prices of cryptocurrencies. The market rebounded in a few short days and many cryptocurrencies continued on their upward price trajectory. By December of 2017, news began emanating from South Korea that the country’s government was about to ban cryptocurrency exchanges as well. Reports of tax evasions and sundry financial irregularities were the reasons given for the government’s plan to shut down South Korean crypto exchange platforms. The government prohibited crypto exchanges from opening any new trading accounts.
This news from South Korea came around the same time as China was embarking on another round of crypto-related crackdowns concerning overseas crypto exchanges, over-the-counter (OTC) exchanges, and bitcoin mining. In addition, there were reports from the United States Congress moving to examine the crypto market critically and the EU wanting stricter crypto regulations. The result was a massive drop in the market capitalization of the entire cryptocurrency market. The price of bitcoin which had almost hit the $20,000 mark in December 2017 fell to below $6,000 in the early weeks of February. South Korea accounts for a large percentage of Ripple trades. Ripple is another cryptocurrency, just like bitcoin. The price of Ripple also fell considerably while the ether dropped below the $1,000 mark after an almost 2-week price surge at the back end of 2017 that saw it attain the $1,000 milestone in the first place.
The News Shapes Investor Mindset
Whether cryptocurrency or traditional assets like stocks, the news can have an effect on the price of these assets. The news is capable of influencing the mindset of market participants thus encouraging bullish or bearish trends. With many news stories emerging at the beginning of 2018 that suggested the introduction of stricter crypto regulations, there were massive selloffs of cryptocurrencies with many scrambling to liquidate their crypto holdings before the price crash. This signifies panic and loss of investor confidence. The end result was a huge market correction that saw almost 50 percent taken off from the global market capitalization of the entire cryptocurrency market.
The Brexit Vote of 2016
This same initial panic and massive selloff happens in the more traditional financial markets as seen in the immediate aftermath of the 2016 Brexit vote. Stock markets were plunged into turmoil with some dropping as much as 500 points and the Pound Sterling dropping to its lowest level against the dollar in decades. Many financial markets all over Europe took a hit. One of the more profound aspects of the Brexit vote was that the result seemed to take the market by surprise. It is a clear example of how a bit of unexpected news can cause major upsets in the financial market. A lot of the sharp price movements noted during the immediate aftermath of the vote was down to investors trying to make sense of the ramifications of the vote.
Closing Remarks
While some traders sold their crypto holdings when the price of bitcoin tanked, there were holders who either held on to their positions or bought massively. Recently, news broke out of a mystery bitcoin trader who bought $344 million worth of bitcoin within the space of 3 days while the price of bitcoin was still recovering. Some financial experts will say that times when the prices of assets drop are the best times to invest in lieu of the inevitable upward price swing. One thing is for sure, and that is the news has a profound impact on the price of both cryptos and traditional assets.
