EVENTS WHICH TRIGGER CRYPTOCURRENCY PRICES
Every asset class undergoes price rallies and cryptocurrencies are no exception. Bitcoin has made more news based on its unpredictable price rallies and its volatility has always prevented a lot of risk-averse investors from investing. After every event, we hear a flood of arguments following the erratic and colossal price movements of Bitcoin. The markets are still largely driven by sentiments, some of which are driven by a few triggering events occurring repeatedly since 2014. In this article, we discuss these events and also the sentiment-driven movements which follow these events.
Every Price rally has 3 stages. These stages are decided based on behavioral psychology as the generalized behavior of investors is majorly responsible for riding the prices of any asset class:
- Surprise: Most price rallies are triggered unexpectedly catching most investors by surprise.
- Trend Following: Contrary to technical analysis which believes prices to never follow the past trend rather react to them, price rallies form trends driven by the surprise received by the market.
- Subjective Explanations: the experts try to come out with probable explanations to explain these movements. Undoubtedly, cryptocurrencies can become a splendid example in behavioral finance.
Let’s discuss the triggering events now:
Governments still don’t know what to do about cryptocurrencies. They’re not sure how to regulate them or even define them. Trust in cryptocurrencies might eventually rise with more solidification of the legal environment, but as of now, it still stands confusing. News from different parts of the world on legalization of cryptos have tremendously influenced the prices. Right now, not only the US but the entire global markets think that one thing that would give cryptocurrencies a whole new level of legitimacy is cryptocurrency ETFs. Up to this date the SEC has said no. They are not really “against” cryptocurrencies but the hearings have been constantly postponed.
In special cases, a country who adopts a cryptocurrency or invents their own may take Bitcoin’s prices in either direction. This might seem a bit unrealistic at first, but looking at unending announcements from various countries, sooner or later this might happen. Also, Bitcoin is acting as a safe haven for the countries where inflation has entered within people’s nerves. Venezuela, Zimbabwe, Greece or any other such country is moving towards bitcoins to junk the traditional economic system.
As well as regulation, current affairs that seem to have nothing to do with cryptocurrency can have an effect on the share price. Cryptocurrency is often seen as an alternative to what is known as “fiat” currency — that is, currency where the value is backed by the government that issued it. But the normal global events like the US-China war, Brexit, or EU’s negative interest rates are impacting the price of Cryptos. Just like during previous periods of global market tensions, the ongoing trade war between the US and China has investors spooked. The uncertainties have resulted in an uptick of demand for traditional safe-haven assets, indicated by the flood of demand that is going into longer-term bonds, for example.
Adding to global market tensions, economists expect monetary easing by central banks reminiscent of what followed the global financial crisis and European debt crisis around 2008. That, together with the near-certain event of the US Federal Reserve to cut interest rates in July has led investors to start buying inflation hedges. The biggest difference today, compared to the crisis in 2008, is that all of these events are happening at a time when cryptocurrencies and blockchain present a viable alternative way for people to manage risks.
The Entry Of Big Funds
Among those new investors will be the big investment funds: pension funds, hedge funds, and so on. Some companies are already putting together crypto investment funds but once the giant investment shops feel confident enough add altcoins to their portfolios, prices will jump. With more crypto-inclusive hedge funds, crypto exchanges and fintech companies building for the institutional market, new waves of capital are being driven into the Bitcoin market.
Cryptocurrency investors who lived through the dotcom boom will know all about how speculation can push up the price of an asset or deflate it just as quickly. Speculative investors hope to make money out of cryptocurrencies, but may buy and sell quickly, adversely affecting the market or causing short-term swings. Whale investors trade with a large chunk of money which conclusively bring large movements in the prices.
From bitcoin’s beginning to the proliferation of new currencies today, hacking has remained a problem for cryptocurrency investors. Every major hack into the system, or into cryptocurrency exchanges or wallets, has provoked a price crash. Recently, an attack on the cryptocurrency exchange Binance caused a 10.8pc crash in a matter of minutes.
New ICOs, STOs and interesting cryptocurrencies with compelling uses of technology and advanced business models enter the market, and investors have no option but to trust these companies and invest in them. As one becomes popular, money flows into it from other currencies, affecting their price. Meanwhile, new currencies are launched every day, which can also have a diluting effect as 90% of these currencies fail in the end. Hence, diligent research is needed before investing in any of these projects.
Forks are to event-driven crypto investors what spinoffs are to event-driven equity investors — one-off events to buy an unloved, financially-engineered splinter. There are two types of forks in crypto — the soft and hard fork. While soft forks are typically just backward-compatible software upgrades, hard forks introduce a new rule into the system with consensus. New rules are introduced in to the system and the blockchain is split at a particular block. A new financial asset is formed and investors wish to take advantage of the early rise in their prices. In BCH’s case, its existence provides a hedge if BTC breaks, as BCH would then “take-over” the community. However, there is an adverse sentiment where BTC supporters don’t consider BCH a close competitor to BTC or should we say, denounced BCH on media channels. Similarly, for ETC, it exists as a hedge for potential ETH governance failures. In the case of BCH, the rally post-fork was immediately followed by a sell-off as many BTC holders likely disposed of their BCH for the free gain
Mining reward halving
These technical developments likely reinforced expectations of a stronger rally ahead of the incoming halving, a scheduled, programmatic reduction in the amount of new bitcoin paid to miners. Bitcoin is set to undergo a mining reward halving in May 2020. Halving is when the protocol automatically reduces new issuance after a certain number of blocks are processed, an event that occurred most recently in 2016. Indeed, historical data shows that bitcoin traders generally respond to the halving, and that the event serves as a signal and potential catalyst. The narrative that BTC is set to repeat history by breaking into a bull market at least a year ahead of the next mining reward halving (due August 2020) has only strengthened over the last three months, possibly leading to the bull breakout in mid Oct.