What Are Driving Prices In The Cryptocurrency Industry?
One of the major drivers of prices in the crypto markets is the growing sentiment and optimism surrounding the industry. Since Bitcoin and many other cryptocurrencies are not backed by any asset, their prices fluctuate based on a demand-supply model; in other words, the price of a coin is determined by the people that invest/buy it. As the sentiment and optimism for the industry grow, demand for cryptocurrencies increases, and therefore so does the price. Also, as Bitcoin and other cryptocurrencies continue to exist and grow (past and current exposure), the more likely it is for them to continue to do so (future exposure); this is known as the Lindy Effect. There are also factors behind the growing sentiment and optimism – mainly the growing support for positive legislation to govern this industry on a global basis. Particularly, here in the U.S., we have seen Congress and the SEC recognize the need to implement legislation sooner rather than later and that the legislation should allow the industry to grow while protecting consumers and investors (for more information on this, please see my article: “The Token Taxonomy Act”). While this is something that has remained in place for years now, since the introduction of Bitcoin in 2009, there are some factors that are unique to the industry’s current placement. One such factor was the “halving event” of Bitcoin. While I discussed this in my article, “What Will Happen When Bitcoin Halves,” as a quick overview, miners have rewarded Bitcoin – and any other currency depending on the chain they are mining – for each block that is mined. Every 4-years, in response to inflation, the rewards are halved as the difficulty to mine increases. Due to this, we have now approached an equilibrium in which rewards are just able to cover the costs to mine, which are mainly computer costs and electricity costs. At this point, since miners may no longer receive a profitable return, and in some cases may be experiencing losses, many miners may decide to switch to other chains/coins or cease mining entirely. While we have not seen many miners jump ship, this could mean that there would potentially be a decrease in new Bitcoins being farmed/circulating the market; thus, Bitcoin prices may rise or continue to rise in anticipation of this event.
So-called “whales” are investors that hold a large amount/share of a specific cryptocurrency. On October 13, 2019, there were some “whale” transactions around Bitcoin. In one instance, roughly USD$900,000,000 – nine-hundred-millions US dollars’ worth of Bitcoin was transferred in a single transaction – which carried transaction fee of only USD$166. In another, roughly USD$5,000,000 – five-hundred-millions US dollars’ worth of Bitcoin was moved to a wallet, with a USD$0.69 transaction fee. While these transaction fees show the power and use-case of blockchain technology coupled with cryptocurrencies, the transactions themselves are closely followed by crypto-investors around the world. Historically, such large transactions have shown accumulation by whales due to an undervaluation of the coin in the transaction; in these two cases: Bitcoin. Personally, I believe these transactions were executed in anticipation of the halving event, as I believe that price changes were already factored into Bitcoin prior to the event occurring.
It is also speculated that whales collude to increase the price of Bitcoin and other coins. The thought process behind this stems from the fact that these whales own such large shares of specific cryptocurrencies, it is in their interests to keep the price growing. However, I do not believe this to truly be the case as there is very little evidence to support this claim.
Another factor that could be affecting Bitcoin is the Bitcoin futures contracts. These contracts are relatively new having been launched at the end of 2018. They provide certain positives for traders such as risk mitigation and hedging strategies, as well as being allowed to investors that are unable to invest in Bitcoin directly. Bitcoin futures contracts have an expiration of 3-months with an initial price set by market makers; however, as trading continues the demand-supply model determines the futures’ price.
There are also patterns between the relationship between Bitcoin and altcoins. Many altcoins are positively correlated with Bitcoin; as Bitcoin’s price increases, so do many altcoins. This shows the importance Bitcoin has in the industry. However, we have seen that many investors still view Bitcoin as the “king” of the cryptocurrencies, and Bitcoin is on the rise – on a bull trend – many investors convert their altcoins to Bitcoin to ride the wave, and when Bitcoin is stable, they tend to remain with their altcoins. Bitcoin-Altcoin pairs are the most popular trading pairs as investors either use Bitcoin to buy altcoins or use altcoins to buy Bitcoin depending on the situation.
Lastly, institutional capital has some influence on the market. Institutions investors in cryptocurrency deploy various high-level tools and investment models when determining an investment strategy – since they are investing a larger amount of money than every day/retail investors that tend to invest on sentiment/optimism and only use basic investment analysis tools. (This is something that my company, Omnia Markets, is addressing by providing the most sophisticated analysis platform for cryptocurrencies to investors of all stages). Some retail investors have started following institutional investment activity for their own strategies; although, institutions tend to invest in the longer-term than retail investors do. As institutional investors increase, there is a steady pace/growth for cryptocurrencies, and as the industry matures, grows, and moves forward with the inclusion of healthy and beneficial legislation around the world, more and more institutions will look towards cryptocurrencies as something they can add to their portfolios.