Translation: Blockchain in Vernacular
Why do you invest in cryptocurrencies? There are all sorts of reasons why crypto investors interact with the space. Maybe you value “decentralization” or maybe you don’t like fiat currencies and censorship. Whatever your reason, most crypto investors would rather leave with more money than when they came in. Understanding cryptocurrency prices is essential to making your love of crypto a profitable experience. Cryptocurrency prices are affected by an almost endless number of factors that interact with each other at the same time. Let’s take a look at those factors. 1. Best Cryptocurrency Investment Prices Volatility is what makes cryptocurrency investing so rewarding (and risky). However, there are so many variables that it often feels unpredictable. Even weeks after a rally or flash crash, most people still don’t understand what caused it. If you don’t, they’ll catch you off guard again the next time. The good news is that you don’t need to know about price movements at all times. It all has to do with when, how, and where you trade. As for the types of cryptocurrency prices:
Long-term price trends are the most reliable and predictable. Short-term prices are riskier and while they may sometimes work in your favor, they will eventually re-align with long-term prices.
Platform prices move with liquidity. Centralized exchanges (CEX) tend to have the most accurate prices, while decentralized exchanges (DEX) do not. Unless you are trading on Uniswap, etc., the price difference on small DEXs can be more than 10% (you can take advantage of this through arbitrage trading).
The most reliable cryptocurrency price trackers are decentralized oracles, such as Tellor. This is because they aggregate prices from many different exchanges to find the most common and accurate prices. You can use them right now by watching such price information. Assuming we are looking at medium/long term prices from oracles and large exchanges, let's see what the top 10 factors are. 2. The top ten factors affecting cryptocurrency prices
These factors will help you predict the price of cryptocurrencies like Bitcoin and altcoins like Uniswap v3, but that doesn’t mean these factors explain every move. Cryptocurrency prices are complicated: sometimes it’s the second factor. Sometimes there are five at once. These are the ten most influential, in no particular order.
1) Token Supply and Demand The most influential factors are often the most universal and simple. When more people want to buy, the price goes up. When there are fewer coins in circulation, the price goes up. Supply and demand tend to balance each other. Demand tends to rise because cryptocurrency adoption is just beginning (the number of cryptocurrency users is between 300 million and 1 billion). As for token supply, the immutability, trustlessness, and autonomy of the blockchain are very important. Otherwise, founders can create tokens out of thin air at any time. Too much supply will not help the price increase either: ideally, the circulating supply and the maximum supply should be close. Protocols use different methods to reduce the existing supply, such as:
Token Burning: Sending cryptocurrency to an inaccessible wallet address.
Halving: Reducing the validator block reward by 50% after a certain number of blocks.
Classic staking: Securing a Proof of Stake (PoS) network by locking up tokens over a long period of time in exchange for interest rewards.
Proof of Work (PoW) currencies like Bitcoin are most affected by the cost of production. That's why prices rise when electricity costs, the number of nodes, or the hash difficulty increase. Note: PoW is a consensus model based on hashrate and reward competition. The PoS model selects block winners based on the number of tokens, lock length, and randomness. The consensus model determines security, decentralization, and network efficiency (see the blockchain trilemma).
2) Global Economy Decentralization may give the impression that cryptocurrencies are immune to global events. Past experience shows that this is not the case. Both financial and political influences have had a direct impact on medium-term cryptocurrency prices (such as Covid-19 or the start of the Russian-Ukrainian war). It can be said that cryptocurrencies are more vulnerable than fiat currencies in black swan events. This is because investors can choose stable currencies such as the Swiss Franc, the Japanese Yen or the Norwegian Krone. You cannot do this in cryptocurrencies because it involves multiple countries and almost all altcoins are correlated to Bitcoin or Ethereum. Fortunately, cryptocurrency prices recover faster than fiat currencies. Hence why these "bad" events are often the best entry opportunities.
3) Accessibility of Cryptocurrency For those who have been using cryptocurrencies for years, it is easy to overestimate how many people have access to it. By the end of 2022, maybe 1B people will have ever purchased cryptocurrencies, but how many of them are active users holding long-term positions in the market? Adoption rates are not as high as you think, and improving these features will be good for crypto prices and liquidity. This does not mean that a coin should go up simply because it attracts more people. But there should be enough on-ramps and off-ramps to seamlessly convert fiat to crypto. Here is why news like this creates both short-term and long-term price increases:
Payment processors that accept cryptocurrency payments
Payment companies distributing Bitcoin ATMs, crypto cards, etc.
An exchange that offers flexible deposit and withdrawal options
Local stores accept Bitcoin purchases
Send crypto to anyone with a KYC-free wallet
Limiting accessibility will not lower prices, but it will slow their growth. Those who already use cryptocurrencies will not be affected as much as new adopters. For example, some countries ban cryptocurrencies, but millions of citizens still use them.
4) Infrastructure Updates Blue-chip cryptocurrencies don’t change much because their prices are tied to utility. Due to the blockchain trilemma, secure and decentralized networks don’t scale well. This means that higher prices will increase network costs and slow transactions, which will reduce demand and lower crypto prices again. It’s not that they’re not valuable enough, it’s that they can’t afford higher prices yet. If ETH goes from $1,000 to $10,000, it will lose the value of its massive ecosystem because no one will suddenly want to pay 10 times the fees. Infrastructure updates reduce transaction times and costs so the network can manage more people and higher token prices. For example, Ethereum broke $2,000 after it first surpassed $600 after adding PoS in the beacon chain update in December 2020. What do you think will happen after the merger?
5) Media Announcements Media announcements can easily be confused with infrastructure updates. That’s because they go together and amplify each other. The difference is that media announcements are short-term and speculative. The most common reaction is “buy the rumor, sell the news”. In the merger example, traders accumulated ETH for weeks. On the day of the update, most would sell because there was no other reason to justify another surge in price. Like clockwork, Ethereum crashed in September 2013 (but not for long). Media announcements can be:
Promotions (e.g., Crypto.com buys stadium)
Events (e.g. Binance network attack)
Team announcements (e.g. Cardano’s roadmap)
You can tell the difference between updates because none of them affect project functionality or performance. If Binance users lose $10 million in a phishing attack, this has nothing to do with the BNB coin or the BSC chain. If Cardano releases roadmap phases, this is no guarantee that they will deliver on those promises (or that there won’t be years of delays). Media drives up cryptocurrency prices before an event, and updates afterwards create lasting price increases.
6) Inflation of Fiat Currency While fiat currencies and cryptocurrencies are related, they are not directly proportional. Inflation of fiat currencies drives up the price of cryptocurrencies. If people lose confidence in their national currencies, it could accelerate the adoption and surge of cryptocurrencies. Similar to the second point, fiat currencies could put crypto prices at risk. By far, the most popular cryptocurrency pairs are based on the US dollar. This is because the US dollar is the world's reserve currency, which is good for the United States, which has the strongest liquidity, money printing ability, and borrowing power. But in 2022, the situation has suddenly changed. We are facing the financial consequences of 2020 and the events that preceded it. The United States faces a public debt of more than $28T, interest rates close to zero, and inflation of more than 8% (versus 1% inflation in 2020). When interest rates fall to zero, the easiest solution to the debt is to print money. If the new dollars are not distributed properly, inflation will devalue the currency, which will affect cryptocurrencies. If a coin is a store of value like Bitcoin, it may be regarded as gold and reach new all-time highs. Otherwise, it will depreciate like everything else.
7) The Law of Heart Just like fiat currencies can influence cryptocurrencies, one token can influence another. This is not necessarily because they are in the same ecosystem or they are related. According to Richard Heart, this is because they are linked together by liquidity (aka “The Law of Heart”). Liquidity accelerates the adoption of cryptocurrencies (see point 3) because it is the number of tokens that can be traded immediately. The fact that you can directly exchange two tokens makes the prices of both tokens move at the same time. Similar to reserve currencies, when a cryptocurrency has more token pairs on different platforms, it becomes more valuable. Bitcoin has hundreds of altcoin and fiat currency pairs, so its price tends to rise in the long term. Similarly, PulseChain is the first Ethereum fork to inherit the full system status. Unlike other networks, all Ethereum tokens and NFTs can be traded directly in PulseChain pairings. Therefore, there is enough reason to expect that cryptocurrency prices will rise.
8) Revenue generation Revenue is closely related to supply (see point 1), and affects security, efficiency, and thus price. For example, Bitcoin generates a steady $20 million in revenue per day through 1 million mining nodes (note that miners may own multiple nodes). Revenue was already this high around 2018, which explains why there are more validators now. As a result, Bitcoin is more decentralized and secure, so more users have the confidence to hold it. Revenue also contributes to the rise in the price of protocol and dApp tokens. DeFi platforms can use revenue to give back to users with increased APY rewards. This can attract users and improve decentralization. Or they can invest it in features that increase utility, ultimately increasing prices. Platform revenue should not be confused with investor returns. When rewards exceed service fees, high-yield platforms still cannot earn revenue. If interest rewards come from inflation or later "investors", the price of the token will not be maintained.
9) Bitcoin Correlation Lag The prices of most cryptocurrencies are correlated to the price of Bitcoin, but they do not move at the same time. When market trends change, investors tend to trade the largest coins first. These blue chip projects have high volume and are stable, so they are safer in case of a trend reversal. Assuming the trend continues, they take profits from these cryptocurrencies and then invest in other cryptocurrencies that have not risen yet. This can be any coin in the top 50 on CoinMarketCap. Micro-cap coins have lower volumes, so after Bitcoin lags, they will reflect the same price trajectory, but magnified. If Bitcoin rises 10%, these assets may rise 100%. This is beneficial, but also dangerous, because a 30% drop in Bitcoin is enough for small coins to lose 90% or be completely liquidated. The lower the volume, the greater the lag, which is usually 1 to 3 weeks if the trend holds. If Bitcoin's direction resumes before the other micro-caps update, the lag will be canceled and keep the price unchanged. However, if the coin is closely related to the token's ecosystem (such as TraderJoe on Avalanche), the price can reflect immediately.
10) Cryptocurrency Price Manipulation Finally, we cannot ignore the reality of price manipulation. While blockchains may be decentralized, crypto markets are not. Trading can be a zero-sum game where others have the best interest of confusing you and making you lose money (at least in prediction markets like futures and options). When you invest larger amounts, emotions become more complex and can lead to mistakes. Examples of manipulation include:
Pump and dump groups sell high-priced worthless tokens
Using media news to rationalize potential pump
Trading on your own and faking volume (wash trading)
Create bull and bear traps to trigger stops and short squeezes before an actual rally (or crash)
This involves not only understanding the factors that affect the price of a cryptocurrency, but also understanding how other factors affect it. If many people believe that Bitcoin will reach a certain price, it may be safer to trade it at a price below a thousand dollars in case it reverses.
The first ten factors are external variables that can change the direction of cryptocurrency prices. But cryptocurrency prices also influence themselves because traders change positions based on the market direction. So, assuming these ten factors do not intervene, cryptocurrency prices will still change. Imagine that a token like Ethereum rises tenfold due to demand and speculation. What will happen is:
1) Increased network costs Network fees use the native currency (ETH), so any time the token goes up, network fees will increase accordingly. If the fee is $0.01 to $0.10 per transaction, there is no problem. If the average price is above $10, then a 10x price increase becomes $100. Once the price goes up, inefficient fees become paralyzed. Users don't want to pay these fees, so they will stop using the network until the price drops. The tokens most vulnerable to price drops are low-scalability blockchains with large ecosystems.
2) Volume Cycles If the price of Bitcoin or Ethereum goes up for months without crashing, eventually all crypto projects will imitate it. As investors become confident, they will look into smaller volume tokens with long-term potential. Small projects can go up 10x to 100x in a few weeks, which is more attractive than the ROI of the top 10 tokens. Trader demand for Bitcoin is dispersed into smaller projects with a lag of several weeks. It goes into the top 50 tokens, ecosystem tokens, Metaverse tokens, NFTs, and ends with meme tokens. Profitable meme coins usually signal the end of the cycle, followed by a Bitcoin crash and everyone reinvesting in blue chip cryptocurrencies.
3) Overall Market Direction Market conditions change investor and price behavior. For example, the goal in a bear market is to buy at the bottom and avoid losses. Selling pressure is high, so any price increase is likely to result in a lot of selling, rather than parabolic growth. It is common to sell when things are going up and wait when they are going down. The "goal" in a bull market is to take profits first. Because if you are late, you will be unprepared for the upcoming bear market. For long-term bulls, selling is replaced by holding, and it seems that buying anything at any time is a good deal. But is it really so?
4) Take Profits and Reinvest Have you ever felt that the price movement went against what you planned? Your prediction is not necessarily wrong. It is that there are larger early investors who can profit from smaller price changes. If someone else takes profits first, it may trigger someone else's stop loss order, leaving you with a loss overnight. If you are considering buying a coin that is rising in price, the point is not whether it will continue to rise. It is about how many people may have bought before you and are ready to exit.
5) Capacity and Network Congestion Volatile prices can attract high-frequency traders and overload the network. As larger investors join the market, smaller trades lose priority. If you don’t want your order to be delayed for hours, you have to pay extra to increase priority. Congestion and network fees are related, and they both drive down cryptocurrency prices. How to Profit at Any Crypto Price While you’re waiting for the right price to buy, countless other traders are waiting too. It’s easy to predict (and manipulate) when everyone is waiting to buy low and sell high. But there are ways to profit no matter which way the price is going. When prices are falling, you can profit by using futures, options, and short positions. For example, if you think a merger will cause Ethereum to crash, you can open an ETH short and profit when it crashes. It does. If this is a boring sideways market, now is the best time to use DeFi tools. Because the yield is highest when token pairs are not changing. This is your chance to accumulate funds without having to buy through staking and borrowing. When you can profit anywhere, you’re always ready to enjoy the best cryptocurrency prices. You’ll make enough profit to exit before a bearish reversal, and you’ll have enough funds to buy at the bottom.
4. Frequently Asked Questions
1) Can cryptocurrency prices go to zero? Cryptocurrencies don’t go to zero because they are worthless, but because of security issues. It could be a blockchain with a bad consensus mechanism, insufficient validators, or an unbalanced token distribution. Even after crypto audits, network attackers sometimes find code bugs with infinite money glitches. Do research to avoid these events, or at least be diversified enough.
2) Will cryptocurrency prices continue to rise? Cryptocurrency prices continue to rise over the long term due to their intrinsic value. In a few decades, many tokens may not exist, and the leading tokens as we know them may be replaced. But cryptocurrencies will not disappear: even 100 years from now, society may still use some kind of blockchain system. If you hold widely adopted cryptocurrencies like Ethereum, their prices will inevitably rise.
3) Should I compare cryptocurrency prices to market cap? Cryptocurrency price multiplied by token supply equals market cap. Contrary to popular belief, it has nothing to do with company size or price predictions. Developers may change token supply to whatever amount they want, and if supply does not change, observing price history provides the same information.
4) Can you profit from the price of cryptocurrencies by not selling? Not only can you, but you should. DeFi services allow you to extract value while holding tokens on the network/protocol. You can profit through staking, lending, or yield farming without selling your initial amount. This way, users can help their tokens gain liquidity and a stable floor price. So if you want to sell, the price will likely be higher than your entry price. Plus all the rewards earned in the process.
5) Should I try to predict cryptocurrency prices? You should predict cryptocurrency prices based on your trading style. If your strategy is to hold long term, you must predict/analyze which coin has the greatest utility/value/price potential. For HFT, prediction is technical and news analysis. In futures and options, prediction is betting and taking asymmetric risk (either a small loss or a big win). You cannot predict all cryptocurrency prices all the time. So you should choose a strategy with the probability in your favor. Dollar-cost averaging, holding, and value investing are time-tested and recommended investment methods.