The volatility of cryptocurrencies is a tool, on the basis of which, trading strategies and methods of trading in the market are built. Let’s take a look at the main reasons for cryptocurrencies’ price changes.
The reasons for serious price fluctuations are divided into conditional groups:
Cryptocurrencies do not have a “fundamental anchor” that ensures stability. This is why the described reasons affect quotes more strongly, forming market sentiments and volatile trends.
Technical reasons are responsible for local market changes:
Constant change in demand and supply
Correlation of different assets
Reallocation of portfolios
Changes in market sentiment
Market sentiment is formed as a result of the struggle between bulls and bears. With the predominance of upward traders, quotes rise, and because of a large overbought situation, a pullback and a downward trend occurs.
In the absence of a fundamental anchor, which does not allow the price to move beyond full collateral, volatility increases in proportion to the mood of traders.
Looking at fiat assets, you can see similar movements on a smaller scale. The fiat EUR/USD pair moves in the same way as cryptocurrencies, but the price range is measured in tens of fractions of a cent, not hundreds of dollars.
A whale is a large player with total assets that exceed the current market liquidity. The whale is able to form an impulse and a wave of transactions that will shift the rate in a convenient direction, and then, by reverse selling, will lead to the collapse of the crypto market to the previous level.
By simply looking at the charts of cryptocurrencies, you can find significant jumps in quotations as a result of a serious excess of market liquidity by several times.
There are two types of correlations with Bitcoin. The first is direct forks and first-generation cryptocurrencies. The price of such coins rises when the value of Bitcoin itself rises.
The rest of the cryptocurrencies at this point begin to fall significantly, since most of the attention is tied to the parent cryptocurrency. Moreover, in order to make a profit, speculators are likely to transfer funds to BTC through stablecoins, which leads to an outflow of money from altcoins and an increase in the value of BTC. Over time, when interest in Bitcoin falls, the distribution of capitalisation returns quotes to original places.
High liquidity is an ability to quickly transfer one asset to another. Large movements of currencies in the form of redistributed portfolios move quotes, in proportion to the withdrawn funds, and form stable trends for ordinary buyers. This phenomenon applies mainly to altcoins, and is practically independent of Bitcoin.
Fundamental factors and external reasons change the pricing policy of Bitcoin and altcoins. Cryptocurrencies are influenced by events and news related to:
Approval of first and second order derivatives.
The release of enhanced computing power.
Political events in individual countries.
Local events related to development, marketing and technological upgrade on the blockchain.
Regulatory news is encouraging for traders and investors. Crypto investors are counting on the emergence of institutional traders with large capitals.
Institutional capital includes hedge funds and large holdings.
The strategy of such structures is based on operating with large volumes in combination with a locking strategy. The growth in volumes ensures the growth of liquidity and quotes, as well as an exponential increase in capitalisation.
For example, the crypto market is growing amid news about Bitcoin regulation in the United States. When the meetings of the Financial Commission of the Federal Reserve postpone consideration to the next quarter, the crypto market rapidly collapses.
The cryptocurrency market capitalisation can also be increased by news about the appearance of derivatives: futures, bonds, options and other financial instruments with indirect capitalisation.
The advent of derivatives opens up new markets and methods of speculation that can increase the total capitalisation of cryptocurrencies.
The advent of improved Asic processors and improved graphics cards are increasing the processing power of networks. For a short period, the amount of mined cryptocurrency increases exponentially, which leads to inflation.
The potential drop is calculated based on the power of the new device, the power consumption and the change in the emission rate in relation to the power expended.
The predictions are usually incorrect since they do not consider the availability of miners to consumers. The release of new devices is associated with a shortage of pre-orders, which allows the network to adapt to new capacities and maintain the emission rate.
The deposition of foreign capital into the cryptocurrency market during political instability has an unpredictable effect on capitalisation. The worse the political and economic situation in a particular country, the higher the popularity of cryptocurrencies.
From an investor’s point of view, cryptocurrencies are easier to store, buy and sell than gold, dollars or foreign bonds.
After the normalisation of the political and economic situation, investors return their funds to fiat capital, which leads to the fall of Bitcoin.
The introduction of technologies, the transition to a new stage of development, the compliance of the roadmap with the market kit and subsequent implementation – all this can create positive sentiments in the market and lead to an increase in the position of altcoin. Local news correlates only with small cryptocurrencies, without affecting large projects such as BTC, ETH and EOS.
There are numerous factors which influence the price of cryptocurrencies. Some of them are not obvious while other factors are responsible for unpredictable results. Pricing is analysed and forecasts are based on market sentiment and fundamentals. Differences from fiat assets are only in the terms of the weighting factor.