The world of cryptocurrency and digital assets is still in the nascent stages of its life, so high volatility that can rise from extreme lows to extreme highs and back again should be somewhat expected. However, there are a few factors that can influence the highs and lows of a cryptocurrencies’ value, which can help you make better purchasing decisions as you become more familiar with the cryptocurrency market.
Here are a handful of factors that you will need to take into consideration before buying any cryptocurrency, as they can directly impact the value both positively and negatively.
Some of these factors even entwine with one another to create multiple sources of influences on the price, so it is essential to be aware of how a cryptocurrency’s value can be manipulated by current events.
The news is one of the primary factors of influence for cryptocurrency valuation, much the same as positive and negative news can affect the stock market. In fact, news of any of the following factors on this list can directly impact the price of a cryptocurrency in both directions, so it is essential to stay in the know about the cryptocurrencies you are holding or considering to purchase.
High-profile news events like a government debating regulation for the cryptocurrency market or a hack of a popular exchange can send the price of cryptocurrency spiraling in the abyss.
Conversely, news that a major retailer like Walmart or Amazon has started accepting cryptocurrency would cause the price to rise astronomically.High-profile news events like a government debating regulation for the cryptocurrency market or a hack of a popular exchange can send the price of cryptocurrency spiraling in the abyss. Click To Tweet
Cryptocurrency truly is a global currency, as an exchange hack in a small country like South Korea can have a direct impact on the value of the cryptocurrency that was affected.
The news is by far the most important influencing factor for cryptocurrency valuation because it directly ties into each of the following nine elements as the transmitter of these factors. The more widespread the coverage of the news event, either negative or positive, the more volatility you can expect in that cryptocurrency for at least a few weeks.
You should never discount the fear factor when it comes to investing in cryptocurrency, either. With the success of Bitcoin and the astronomical sums that some people have made from buying low and selling high, there is always tension in the market surrounding fear, uncertainty, and doubt (FUD).
Every time a piece of positive news airs and the price of a cryptocurrency rises significantly, a wave of people hoping to buy in while the cryptocurrency is rising continues to fuel this growth.
As the market corrects and some people take gains by cashing out into fiat again, this causes the less-experienced with investing to get emotional about the rise and fall in valuation. They might pull their funds out and immediately regret doing so when the bull trap correction hits, or make other poor decisions based out of fear.
Billionaire investor Warren Buffet famously said that investors should be fearful when others are greedy, but greedy when others are fearful. Not always following the hype crowd and waiting out an investment can help when investing in cryptocurrency in the long run, but FUD will still play a role in the valuation of the currency.Billionaire investor Warren Buffet famously said that investors should be fearful when others are greedy, but greedy when others are fearful. Click To Tweet
While cryptocurrencies may seem unrelated on the surface, especially with the different purposes they serve, mutual influence often causes a ripple effect across multiple currencies, even if that specific currency wasn’t impacted in the news.
For example, when Bitcoin first started experiencing its big boom in 2012, Litecoin’s value rose right along with it as people were hoping that Bitcoin’s adoption would fuel the adoption of Litecoin. To some degree, their speculation has been right, but that might not always be true in the future, especially as new coins reach maturity and widespread support beyond more than a handful of exchanges.
Right now, Bitcoin is considered the gold standard of cryptocurrency since it can be exchanged for hundreds of smaller cryptocurrencies and initial coin offerings (ICO).
Most cryptocurrency enthusiasts who want to dabble in small-cap cryptocurrencies will need to buy BTC and convert it into their chosen cryptocurrency, so the mutual influence is a huge factor for young cryptocurrencies that are reliant on enthusiasts who trade BTC for it.
News of government regulations surrounding cryptocurrencies is one of the quickest ways to tank the value since the market is highly unregulated. Regulations from any government can impact the value of cryptocurrency, so it may not even be your country of origin causing the volatility spike.
China is the country keep an eye on when it comes to regulations surrounding cryptocurrency, as a significant portion of mining operations are based within the country thanks to cheap electricity and labor costs. Early in 2018, there were rumors that China was considering a ban on cryptocurrency mining due to its massive electricity usage, which impacted the value negatively.
China has since addressed the rumors and says they have no current plans to ban Bitcoin mining, but the market definitely reacted to the rumors and the denial of rumors by the Chinese government.
Widespread adoption of cryptocurrency is one of the most positive influence drivers for the valuation of the currency to date.
When significant retailers announce their support for any cryptocurrency, it helps create value for those who already hold the currency. It also gets more eyeballs on the currency as a digital asset and helps expand interest in owning the currency as a digital asset.
ICOs have also had an impact on cryptocurrency values as they have become a new funding method for Silicon Valley start-ups to raise capital funding. Those interested in owning a stake of a start-up can purchase tokens offered in an ICO with existing cryptocurrencies like Bitcoin and Ethereum.
Not all ICO news is good news, however. The SEC has a rigorous definition of what it defines as a security, and some ICOs have failed to pass that test, marking them as a security that is subjected to increased regulations.
Still, the overall spread of uses for cryptocurrency in modern society means the public is getting more familiar with the idea of using digital assets. This, in turn, increases adoption rates as retailers and businesses begin to accept the cryptocurrency as a form of payment.
While many cryptocurrencies are reliant on Bitcoin as an exchange medium, that may not always be the case. Newer, faster cryptocurrencies are springing up that address some of the problems that first-generation coins did not have the foresight to address.
This sort of competition could eventually drive older coins to uselessness as better technology is created to deal with stress points that have inhibited the network’s growth. Ethereum was conceived as an infinitely scalable cryptocurrency that is Turing complete to address Bitcoin’s own shortcomings.
Bitcoin remains valuable as an exchange medium for other cryptocurrencies that have more specialized tasks, but it remains to be seen if this will continue to be the case as other cryptocurrencies become more established and accepted.Bitcoin remains valuable as an exchange medium for other cryptocurrencies that have more specialized tasks, but it remains to be seen if this will continue to be the case as other cryptocurrencies become more established and accepted. Click To Tweet
People rely on exchanges to purchase and sell their cryptocurrencies, which requires a certain amount of trust placed in that institution. Just like old-timey bank heists in the 1800s, non-secure exchanges are a juicy target for hackers who want to make a quick buck.
Perhaps the most famous example of this is the Mt. Gox heist that happened in 2011 when 850,000 bitcoins were stolen and never returned. Mt. Gox was the premier Bitcoin exchange at the time, but it was never designed with security in mind. The exchange’s failure lead to a mini-crash in the value of BTC at the time, but the cryptocurrency has since recovered.
Still, this high-profile exchange hack resulted in many exchanges taking security more seriously, since all it takes is just a minor slip-up. Some exchanges even offer bug bounties to white-hat hackers who can penetrate their systems but share the information with the company to help fix the security issue.
Coin exchange bankruptcies can be a result of a hack or poor management, but they directly impact the value of the currencies they traded in when the news is announced.
South Korean exchange Youbit recently experienced a debilitating theft of 17% of the total assets held by the exchange. This wasn’t the first time the exchange was targeted in an attack, either. Youbit was rebranded from Yapizon after the first attack to distance itself from its flawed security past.
Because of the massive loss of assets, Youbit can’t guarantee those who were impacted will see their funds returned to them. Because of this, the exchange must file bankruptcy and follow all bankruptcy proceedings to allow current customers to withdraw what wasn’t stolen.
Just as the stock market is susceptible to organized attacks, so to can the cryptocurrency markets be impacted by just about anyone with interest in manipulating the price.
While cryptocurrencies themselves are decentralized, the market is not. Fluctuations for Bitcoin can have a ripple-like effect on its smaller cousin cryptocurrencies.
Another form of organized pressure is called a 51% attack, due to the way Bitcoin mining works. A 51% attack is a potential attack that could happen when 51% of the miners on the network who control the hashrate decide to hold the network hostage to have their demands met.
This type of attack has not been attempted yet since it does not give the attacker full control over the network, but it is theoretically possible, and something that might become an issue in the future as mining operations for the last 20% of BTC become more consolidated.
Cryptocurrency is a growing market that is expanding to many industries outside of financial institutions. Blockchain technology and tokens are allowing industries like real estate, healthcare, legal, politics, media, and even startups.
We briefly touched on ICOs as a new means to raise capital for start-ups, but blockchain technology itself will disrupt how each of these industries functions in the future.
For example, legal contracts such as wills can be stored on the blockchain to be securely verified. Any changes made to the document are noted publicly and authenticated, so there is no question about the authenticity of the document.
As blockchain technology develops for industries outside of the financial sector, cryptocurrencies will benefit from this as a form of adoption.
As you can see, there are a variety of events that can impact the value of any cryptocurrency on the market. Remember that mutual influence can affect every cryptocurrency when both good news and bad news is delivered, so it is essential to stay aware of current events if you have any investment in digital assets at all.
Being aware of how each of these ten factors can influence one another can help you get a better idea of how the market will react to news as soon as it hits. The news itself is an over-arching concept that touches on each of the other nine factors, but it is not the be-all, end-all for deciding whether a cryptocurrency will fail or succeed.
Many detractors of cryptocurrencies thought that Bitcoin’s crash after the Mt. Gox hack signaled the end of the experiment. BTC prices fell from $550 down to below $450, and experts decried how the exchange’s lax security measures spelled doom for the nascent coin. Today, we know that Bitcoin is stronger than ever thanks to the highs it reached within the last year. Keep incidents like this in the back of your mind when following the cryptocurrency market and Warren Buffet’s advice might give you a prime buying opportunity for any cryptocurrency.