This volatility indeed gives traders and investors great opportunities to reap decent profits. This volatility has made crypto assets a highly rewarding investment alternative to traditional options.
But what are the factors that drive this market behavior? What are the factors that make cryptocurrencies trade at the prices at which they trade?
The fundamental driver of any market is the news surrounding it. Any positive or negative piece of news influences the sentiment of cryptocurrency traders and all other participants.
E.g, when in 2018 the Reserve Bank of India declared a ban on cryptocurrency exchanges having business relationships with banks, it did jolt the digital asset market in the country, and prices started freefalling.
Likewise, annulling of the same, and the subsequent COVID-19 lockdown saw confidence trickle back into India's cryptocurrency community. Exchanges reported a 400 percent increment in trading activity.
The latest crypto rally can be linked to the declaration of 'bitcoin as money' by a federal U.S court on July 24. Also, the news about US banks allowed to offer crypto custody services could have served as fuel.
The current cryptocurrency market scenario, globally as well as in India, can be largely attributed to current global tensions.
All cryptocurrencies have served as vehicles to protect the monetary value of people's savings, whenever things go south on the geopolitical front.
E.g, global events since the beginning of this year, including the coronavirus pandemic have had a catastrophic effect on economies of countries and conventional markets like stocks, bonds, funds, etc.
Hence, people are buying BTC and other crypto assets more, which is reflecting in their market prices.
Historically speaking, every bitcoin halving event until the last one has had an exponential effect on its price.
And not just BTC, the entire cryptocurrency market has appreciated in response to bitcoin's halving events, as can be seen from the graph below.
Bitcoin is the cryptocurrency that started it all, so anything that happens in the BTC ecosystem has a direct effect on the prices of other digital assets.
Release of New Blockchain Upgrades
Cryptocurrency developers work round the clock to enhance the underlying protocol designs of their respective digital currency projects.
And whenever, there is a new upgrade in the system, either through a hard fork (in the case of Ethereum) or in any other way, it implies that the respective blockchains are becoming better versions of themselves.
This directly results in an appreciation of the prices of digital assets running on these networks.
Listing and Delisting on Popular Crypto Exchanges
The listing or even delisting of cryptocurrencies (except the usual standard ones like BTC, ETH, LTC, XRP, TRX, etc) on reputed exchanges has a significant impact on their prices.
The appearance of a lesser-known token on a popular digital asset exchange increases its reliability as an investment. It also increases the overall market confidence around the particular cryptocurrency.
This has a positive impact on prices. Similarly, removal or delisting of crypto assets from reputed digital asset exchanges leads to drastic depreciation in the valuation of tokens.
Every cryptocurrency is designed to serve a specific purpose. Take, for example, Ethereum.
Ethereum's core functionality, the development of smart contracts, and decentralized applications fuelled the ICO boom of 2017.
Such utilitarian features automatically create value for that particular asset in the minds of investors. Prices surge to the upside as a result, and the cryptocurrency can maintain it's position in the market. Ethereum currently is the second-ranked crypto asset in the world.
Trading Activities on Derivative Platforms
In the last 11 years, the cryptocurrency market has matured enough to invite deep-pocketed mainstream financial industry players.
The launch of derivative versions of different cryptocurrencies in the form of futures and options lets these folks expose themselves to digital assets but without actually owning any of them.
Investors can then bet on the future price of cryptocurrencies to insulate themselves from the volatility in prices.
This in turn causes considerable movements in markets. The listing of Bitcoin derivatives on the Chicago Mercantile Exchange (CME) in December 2017, is one example.
BTC price tumbled down to $3200 by December 2018, as folks put their money on buying the asset at a much lower price in the future.
Check out the video below if you want to know more about what happens in cryptocurrency futures trading.
A lot of cryptocurrencies operate on the proof-of-work (PoW) consensus protocol.
This means that miners or blockchain network participants who verify transactions and all other activities solve complex mathematical problems to add blocks of information to the distributed ledgers.
The cryptocurrency rewards which they receive for this work are their earnings. Now, miners have to sell a part of their rewards to cover their operational costs. The prices at which they sell goes a long way in determining the cryptocurrency's actual market price.
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