What Drives the Cryptocurrency Market?

What Drives the Cryptocurrency Market?

Join us as we demystify the crypto market's biggest drivers, and learn how to turn trends into tactics for the remainder of 2023.

Think you have crypto's volatile swings all figured out? The real story behind 2022's rollercoaster and whether the downturn will continue involves more than most realize. Read on to learn what’s driving crypto prices and what to expect for the rest of 2023.

The crypto cosmos commenced 2023 with gusto, but global headwinds have now sparked a slight downtrend. Though market capitalization hovers near $1.16 trillion, inflation anxieties whisper warnings.

Bitcoin and Ethereum, pillars of the cryptoverse, shone with stability early in 2023. Their prices glimmer green but lack luster. Experts foresee the rally reigniting once macroeconomic fog lifts, particularly in the U.S. and U.K.

But what’s behind the green light, and should the remainder of the year be a cause for concern?

If the forces guiding the cryptosphere have you puzzling, celebrate your fortune, for we're delving into those very market movers and price prompters herein. Delay no longer — let's get started.

Cryprocurrency Price Factors

It's common knowledge that the crypto landscape is extremely volatile. But why? And what's behind these price oscillations? Let's delve into the key contributing factors.

  • Demand and Supply Interplay

The supply-demand theory goes that if the demand for a particular asset outstrips its supply, its value is expected to rise, and vice versa.

👉 In other words, if the number of people who want to purchase crypto surpasses those who wish to sell it, the price should theoretically increase. Conversely, if more people want to sell than buy, the price would likely drop.

But what triggers people's decisions to buy or sell crypto? It generally boils down to factors such as fundamentals, macroeconomics, sentiment, and technical forces. These elements interact and are intertwined.

In the context of crypto, supply often relates to the issuance mechanism of a specific token in its tokenomics. Certain tokens, like bitcoin have a set supply, whereas others, like ether, don't have a cap. Some market players perceive tokens with a set supply as having less selling pressure. Events that could influence supply, like halvings and token burns, may also sway prices. For instance, Bitcoin's halving events, which limit new supply, are often seen as bullish for the price.

  • Fundamentals

In the stock market, core factors typically refer to elements that directly impact a company's profitability, growth, and financial stability.

For crypto, even though some protocols don't generate profits and thus lack traditional fundamentals, there are alternative indicators of a protocol's health and growth. These include the growth of network addresses, node count, developer activity, the number of dApps on the network, scalability, decentralization, network security, and real-world use cases.

👉 For more information on doing fundamental analysis in crypto, please refer to this piece: The Art of Filtering: Crypto Fundamentals 101

In terms of blockchain scalability, a critical aspect, three interconnected concepts are security, speed, and decentralization.

Moreover, technical development is another key factor. Significant advancements or alterations in the crypto's underlying network could impact the price and potentially boost value. For instance, the price of ETH rose in the months leading up to Ethereum's major upgrade, 'The Merge'.

Protocols that demonstrate ongoing improvements in fundamentals could attract more buyers, pushing up the price. Conversely, if these fundamentals are deteriorating, holders may opt to sell, leading to a price drop.

  • Macroeconomics

Macroeconomic factors that affect the broader economy also influence crypto prices. For instance, during a recession, people may be less likely to invest or spend money. In contrast, during economic growth with high risk appetite, asset classes like stocks and crypto are typically favored, leading to increased buying.

Central bank policies on interest rates and inflation are examples of macro factors that can affect crypto prices.

  • Crypto News Driving Prices

Sentiment refers to factors that impact people's desire to buy or sell a token based on their emotions. News and social media hype are prevalent examples. A surge in demand due to FOMO can lead to a price rise. Conversely, negative commentary about a token — FUD — can trigger selling, causing a price drop.

  • Technical Forces

External forces can also impact crypto demand and supply. For instance, many traders use trading signals to decide when to buy or sell. If everyone acts on the same signal simultaneously, it could trigger a sudden surge in buying or selling, affecting the price.

Another example is 'short squeezes', where traders who have shorted a crypto suddenly see a price surge. To limit potential losses, they begin to close their positions, leading to a cascading effect of buying pressure, pushing the price even higher.

Historically in finance, some bear market price drops for stocks were amplified when quantitative funds, using the same trading signals, all sold at the same time due to their automated trading strategies. This added to the selling pressure. Conversely, the opposite could occur, where everyone buys on the same signal, adding to the buying pressure.

  • Crypto Regulation Impact on Prices

The unregulated nature of crypto is a double-edged sword. On the one hand, it allows for unrestricted cross-border transactions, free from government controls that typically apply to conventional currencies. On the other hand, it faces persistent calls for regulation from governments and stakeholders. It's only a matter of time before a regulatory framework for cryptocurrencies is established, and its impact on crypto’s value remains a mystery.

The ban on Bitcoin trading and transactions in China in September 2021 had a profound impact on the cryptocurrency's supply and demand dynamics. Prices plummeted from roughly $51,000 at the start of September to nearly $41,000 by the month's end. However, prices swiftly rebounded and even exceeded prior levels as mining activities resumed elsewhere.

In the U.S., for instance, decisions from the SEC can greatly influence crypto prices. In 2021, Bitcoin's price soared to $69,000 shortly after the SEC's approval of the country's first Bitcoin-linked ETF. But a few months later, Bitcoin's price was fluctuating around $40,000.

A more recent and relevant example related to regulation is the case of XRP, which saw a significant price increase in July 2023. This uptick occurred after a judge from the Southern District of New York declared that XRP is "not necessarily a security on its face." This verdict offered a glimmer of hope to cryptocurrency investors, who were relieved that other altcoins might not be classified as securities either. Following the news, Polygon's Matic token appreciated by 17.82%. Litecoin and Solana also experienced notable gains, with price jumps of 18.35%, while Cardano's token rose by 20.31%.

  • Insitutional Investment Crypto Market

In the past few years, there's been a marked increase of institutional participation in the cryptocurrency market, resulting in a myriad of influential trends and developments that are reshaping the crypto landscape.

Firstly, institutional traders contribute their wealth of expertise and experience, taking advantage of their extensive familiarity with financial markets and trading tactics. Their foray into the world of cryptocurrency has ushered in a more organized and refined trading approach, thus stimulating liquidity and stability. Consequently, the participation of these institutional entities has considerably influenced market dynamics, affecting cryptocurrency prices and market tendencies.

Additionally, increased institutional involvement has set the stage for more robust regulation and compliance within the crypto industry. These institutional actors typically operate within well-defined regulatory frameworks, adhering to compliance norms and industry best practices. This shift not only bolsters market integrity but also cultivates a safer and more transparent trading environment for all involved.

👉 Interested in learning about crypto market volatility factors? We’ve got an excellent piece on that one — Navigating Market Swells and Crashes.

Crypto Market Drivers in 2023

The year 2022 was particularly harsh for cryptocurrencies due to massive global uncertainties and the fallout from FTX. The markets were hit harder than ever before. However, at the dawn of 2023, bitcoin and other currencies suddenly found themselves in a significantly improved situation, which later shifted from greedy optimism to cautious neutrality.

Bitcoin, the largest cryptocurrency, now hovers around $29,000 after briefly touching $31,400 on July 14, 2023. Ether has also corrected slightly but shows signs of recovery above $1,800. It hit its highest point since 2022 in April 2023, around $2,100, right after the successful hard fork “Shapella," which could transform Ethereum and its applications.

Looking broadly, though, the cryptocurrency market has been under significant pressure due to widespread worries about recent charges against Binance and accusations from the SEC, coupled with the global geopolitical situation. Nevertheless, easing inflation data and various other worldwide factors have helped to temper the downward momentum of bitcoin and other cryptocurrencies.

Previously, the crypto market demonstrated some positive trends due to an easing in macroeconomic activities that drove a rally in crypto prices. This uplift was mainly attributed to the Federal Reserve's strategy regarding interest rates to stave off a recession and growing confidence in decentralized finance following the U.S. banking mishap. Such factors provided substantial support to the cryptocurrency market, fostering a positive outlook for the remainder of the year.

There's also significant anticipation around the reintroduction of monetary policies that could encompass bitcoin and other digital assets. These changes could potentially sway regulators who have previously seemed determined to suppress digital currencies.

Another fundamental factor contributing to the recent mini-bull rally in crypto is the fallout from bank contagion. This situation has led to substantial losses on various bond holdings, prompting the Federal Reserve to slow down rate hikes to tackle serious liquidity problems.

Increased rates have traditionally burdened riskier assets like cryptocurrencies, as the demand for such assets softens when rates escalate.

How Should You, as an Investor, Navigate Today’s Crypto Market?

The recent upswing in cryptocurrency prices may tempt you to jump in and try to make quick profits through short term trading. It's understandable to want to capitalize on market momentum. But it's important not to get caught up in the excitement and abandon sensible investment principles.

When markets are volatile, it's crucial to stick to the fundamentals of smart investing:

  • Diversify your portfolio with a range of investments and trading strategies, including automated trading
  • Spread your risk to mitigate potential downturns in any specific cryptocurrency.
  • DYOR to stay informed about industry developments.
  • Avoid impulsive decisions and hype-driven investing.
  • Maintain disciplined investment practices.
  • Prioritize security by storing your crypto assets in secure wallets with appropriate backups and security measures.

Regardless of present or future upticks, remain cautious, as the dynamic nature of the crypto space can lead to extreme market fluctuations.

Experts say this current upward momentum in the crypto market isn't showing all the typical signs of a major bull run. Rather, it looks to be more of a bear market rally. Analysts warn that numerous mid-cycle rallies often occur within bear markets before a significant shift in broader sentiment. Hence, although you might reap short-term benefits, experts recommend reducing exposure to small-cap tokens and concentrating primarily on fundamentally robust and evolving projects.

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Bottom Line

Cryptocurrency prices can indeed experience substantial fluctuations, but it's these very price shifts that can create potential trading opportunities. Crypto values rise and fall based on supply and demand, swayed by fundamentals, macro conditions, sentiment, and technical factors.

Although the crypto markets seem to be bouncing back from the recent downturn, a sense of 'fear' persists within the crypto community. Experts strongly believe that sentiment remains divided amongst investors, some of whom are still dealing with FTX PTSD and expecting significant shifts in federal regulations on both sides of the Atlantic. Therefore, maintain a cautious approach, stay alert to further market changes, and always keep a positive outlook.


What Are Bitcoin Price Influences?

Unlike fiat currencies, bitcoin is decentralized and not tied to any central bank or government. Traditional economic factors like monetary policy, inflation, and growth rates don't impact bitcoin like they do traditional currencies. Instead, bitcoin operates more like a commodity, with its value determined by different factors, including: bitcoin's supply and user demand, mining process, competition from other cryptos, evolving government regulations, and media coverage.

What Are Ethereum Price Drivers?

In addition to standard market drivers like demand and supply, the evolution and enhancements of the Ethereum platform significantly influence ether's price dynamics. As the platform develops and adds value, ether's price tends to follow suit.

The usage of the Ethereum network has been experiencing significant expansion, largely due to the burgeoning decentralized finance (DeFi) sector and the rise of Non-Fungible Tokens (NFTs). Both of these innovative applications mostly operate on the Ethereum blockchain, leading to increased payment of Ethereum gas fees by their users, which can impact the demand for and the price of ether.

Interest from institutional investors and overall market dynamics also play a crucial role in ether's price. Institutional investment often brings a large influx of capital, which can drive up the price.

However, it's important to remember that cryptocurrency prices can be highly volatile, influenced by a wide range of factors both within and outside the specific cryptocurrency ecosystem. These factors can include regulatory news, technological advancements, macroeconomic trends, and more.

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