The crypto markets can be quite profitable, albeit very unpredictable. Unless you are closely following the news in the crypto sphere, you probably don’t understand why the prices are rallying or tanking at certain periods.
It can be quite unnerving to buy BNB only to see its price go down in the following days. Because of these misunderstandings, many people have lost considerable amounts of money in these markets.
However, there are some indicators that can help you understand the market shifts and predict considerable movements better. In this article, we try to demystify the crypto market and the main forces that drive the prices within. After reading this post, you should have a good idea of what type of news or event to watch when you try to maximize profits.
What is the crypto market?
The crypto market encompasses all the exchanges that facilitate the buying, selling, and trading of cryptocurrencies. The crypto market is quite volatile, because of the relative youth of the assets, as well as the low liquidity of some coins or exchanges.
This means that, unlike stocks or other commodities, the price of cryptocurrencies can fluctuate wildly, often in double-figure percentages. This volatility can be both a blessing and a curse for traders. Savvy traders can take advantage of the volatility to make profits, while inexperienced investors might suffer huge losses.
All in all, the crypto market provides some great opportunities, where considerable risk is involved.
What is the main factor that influences the crypto market?
With that said, the cryptocurrency market is driven by one of the oldest market-driving factors – supply and demand.
Because cryptocurrencies are considered to be commodities, the main reason their prices go up or down is because of increased/decreased supply or demand or a combination of both. In a nutshell:
- As demand increases and supply decreases, the price goes up.
- As demand decreases and supply increases, the price goes down.
For example, Bitcoin has a controlled supply because we know that 6.5 BTC are released in circulation every 10 minutes. Moreover, it has a fixed maximum supply of 21 million coins, meaning that it becomes increasingly scarce as demand increases.
As such, Bitcoin’s value has been constantly increasing, because of this scarcity, and the increased adoption of the asset over time.
How are supply and demand affected in crypto?
There are some important factors and events that can directly impact supply, demand, or both, driving the prices in either direction. Let’s see what they are:
Cryptocurrencies are still in a nascent state, as they have been around for just over a decade. Consequently, many countries haven’t regulated them yet. Moreover, due to their decentralized nature, they are inherently difficult to regulate and control.
This has resulted in governments taking harsh measures in regulating or taxing crypto, sometimes unfairly. This can have a clear impact on the demand, as investors become fearful that they will be left holding illegal assets.
FOMO and FUD
Two major price-driving factors in crypto are hype and fear. Like we mentioned before, prices can go up or down drastically, playing with investor’s emotions.
FOMO is the fear of missing out when investors flock to the markets regardless of the fundamentals of a cryptocurrency. They will buy at a high price because the market sentiment is high and everyone hopes that prices will go up.
The same is true in the opposite case when fear, uncertainty, and doubt (FUD) prevails in the market. Prices go down, which triggers sell-offs, which trigger more price drops. A vicious circle, where everyone comes out as a loser.
Important technology upgrades are another thing to watch out for when trying to figure out price movements in the crypto markets. For instance, the latest Ethereum upgrade turned the popular smart contract currency into a deflationary currency, where the supply is decreased regularly.
Other upgrades, like the upcoming Bitcoin taproot update could drive demand up for people interested in more private Bitcoin transactions.
The mass adoption of cryptocurrencies directly impacts supply and demand. As more people get interested in owning cryptocurrency, the price goes naturally up. This is amplified in cryptocurrencies with a limited maximum supply like Bitcoin because the scarcity over time will only increase.
Mining woes and cost of production can be an important factor as it directly influences the supply of cryptocurrencies. For instance, if the cost of mining goes up, the price of cryptocurrencies that use this consensus model will also increase. This is to compensate the miners for their effort.
The main factor that influences the crypto market is the law of supply and demand. However, there are dozens of events that can directly impact supply and demand directly or indirectly, including geopolitical events, regulations, or just pure hype.
To be able to detect market shifts, you have to follow the news closely and understand how these events can influence the market. Additionally, you can follow market sentiment with tools like LunarCrush to get a general feeling of the traders’ mindset at that moment.