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What Makes Cryptocurrency Go Up or Down?

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Cryptocurrency Go Up or Down

Introduction

Cryptocurrencies have earned the tag of being one of the most volatile asset classes in the world. The designation of digital currencies is not far-fetched, and there is a measure of truth to the claims.

A simple look at any crypto price website would show either double-digit gains or losses within the last 7 days and on days with extreme volatility, it will not be an oddity to see huge price swings. Dogecoin (DOGE) and Solana (SOL) recorded over a 1,000% jump in their valuation in the middle of the bull run of 2021.

It’s easy to attribute the volatility of cryptocurrency prices to random events, but this is not the case. Prices of virtual currencies are determined by the interplay of several factors, and knowledge of these factors would be an added advantage for traders.

Before we jump right in, it is necessary to highlight the importance of a coin price tracker like CoinStats in keeping up with the volatility. CoinStats allows users to track all their crypto and DeFi holdings across multiple platforms from one dashboard and gives other perks to make the trading experience a seamless one.

Here’s why cryptocurrency prices are one of the most volatile assets in the world and the factors behind the wild swings.

1.  Whales

Amongst digital currencies, whales are the most watched entities in the industry. A whale is an address that holds a large number of tokens with the widely agreed benchmark of at least $1 billion worth of assets.

Holding a sizable amount of tokens in circulation has significant consequences for asset prices. A whale’s decision to sell a portion of its tokens has the effect of sending prices tumbling down as retail investors follow their cues. This causes a cascading effect that leads to a strong bearish sentiment amongst investors.

Tesla, a Bitcoin (BTC) whale made the decision to sell 75% of its BTC to put its balance sheets in order in a move that stunted Bitcoin’s resurgence after a harsh crypto winter. Reports of a whale buying tokens are construed as a bullish move that will spur more retail investors to also add the token to their portfolios. Flowing deductively from the above, it will be easy to say that prices are determined by the whims and caprices of whales.

2.  Reports Around a Project

Digital asset prices are often determined by reports around a project’s ecosystem. In the event that a project suffers a hack or botches an upgrade, it could be the harbinger of a spell of lackluster prices. Ethereum’s DAO hack in 2016 dealt a big blow to ETH’s price as the market tried to make sense of the multi-million dollar security breach that just occurred and the murky circumstances around the split to create Ethereum Classic.

On the flip side, positive reports about a project lay the foundation for a bull run. Traders are often incentivized to buy a token after an announcement like the successful completion of a hard fork or a partnership with a leading brand. A strong example is Cardano’s smart contract launch that sent ADA’s price skyrocketing to new all-time highs of over $3.00.

3.  The Age Long Rules of Trading

Trading cryptocurrencies are no different from other asset classes like stocks or commodities. Despite the novel nature of virtual currencies, they are still subject to some of the rules that govern the markets.

For example, after a strong bull run, a price correction is to be expected and after an extensive lull in prices, a spike in value will not come as a surprise to traders. Other applicable rules that affect crypto prices are the concept of demand and supply. As more traders flock to a particular digital currency in demand, the price of the asset will see increase. An increase in supply above the demand may be responsible for the fall of asset prices for the particular token.

To create an equilibrium between the factors of supply and demand, projects have begun implementing various strategies. For Bitcoin, a hard cap of 21 million BTC and halving events have been put in place while others without a hard cap are turning to the deflationary method of token burning to maintain a measure of equilibrium.

4.  Listing on Exchanges

Crypto exchanges have become indispensable entities in the ecosystem, serving as the gateway for several traders to explore digital assets. Listing a virtual currency on a top exchange is one way to create a price rally and there are several reasons for this phenomenon.

Firstly, it introduces the asset to a range of institutional and retail investors, allowing for an easy inflow of capital to the project. Listing on top exchanges improves the liquidity of an asset which makes it possible for investors to open and exit positions.

Furthermore, several researchers have conducted extensive studies on the increase in the value of asset prices after listing on an exchange. Titled the Coinbase effect, the listing of assets on leading cryptocurrency exchanges like Binance, FTX, and Coinbase is one way to guarantee a double-digit gain within days of the listing.

5.  Use Cases

The higher the number of use cases for a virtual currency, the higher its value is going to be. This is because more use cases attract more users which increases the odds of investor funds flowing in.
ETH’s diverse use case scenarios in decentralized finance (DeFi), Non-fungible tokens (NFTs), and decentralized applications (DApps) single-handedly sent ETH to become the second largest virtual currency by market capitalization.

Competition between blockchains might reduce the number of users of a project and this can have dire consequences for the asset’s prices. Solana (SOL) and Avalanche (AVAX) rose to the top of the rankings as a result of their impressive technological advancements, snagging a piece of Ethereum’s market share in the process.

Conclusion

There are several factors that influence cryptocurrency prices and if you stayed till the end of this piece, you’ve most likely learned the reasons behind the volatility. The factors behind the price oscillations include the activity of whales, reports on a project, general trading knowledge, and the use cases of a virtual currency.

With this knowledge, trading decisions can be made from a pedestal of enlightenment to give you an edge over the raging volatility that characterizes cryptocurrencies.

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