Cryptocurrency can a very rewarding investment. However, it is not always as forgiving as other opportunities. There are very understandable questions that an investor or businessperson might have around investing in crypto. Bitcoin, was touted to be the ‘next big thing’ when it was first launched and was trading at a record high of $20,000 in December 2017. A year later, it was down to $3,500.
Such market crashes are not exclusive only to the cryptocurrency domain, but the highs and lows can sometimes be very scary. Also, the jargons surrounding crypto investments can be hard to understand at times. Terms like ‘hard forks’ and ‘halving cycles’ are not breakfast conversation for many of us.
We’re here to tell you that it’s not all rocket science. Most trends and developments in the crypto universe can be attributed to very specific global and technological events. Awareness and understanding is the shield for every investor, and this blog aims to help you develop that. Let’s begin!
1. Understanding the global crypto assets market
Bitcoin’s initial use as a medium of exchange sparked a digital gold rush in 2011. As the rest of us tried to understand the implications of this new form of digital currency, a new ecosystem of exchanges, wallets, and other supporting infrastructure began to take shape. This rapid evolution propelled Bitcoin’s market capitalization to a landmark $1 billion just two years later.
A subsequent watershed event was the launch of Ethereum in 2015. Vitalik Buterin’s brainchild introduced the concept of smart contracts, transforming the crypto world from a mere digital currency landscape to a dynamic platform for decentralized applications (dApps). The rise of Initial Coin Offerings (ICOs) during this era fueled an explosion of new cryptocurrencies, each promising unique solutions to real-world problems. From gaming and finance to environmental sustainability and art, the crypto universe diversified rapidly.
Today, the crypto market is a behemoth, encompassing over 100,000 digital assets with a predicted market cap of 8 trillion dollars by 2025 (Source). This astronomical growth underscores the industry’s immense potential. By examining historical market trends, we can glean valuable insights into the factors driving price fluctuations, investor behavior, and emerging opportunities. Such analysis is crucial for both seasoned traders and those new to the crypto space.
2. Why do crypto prices change? Let’s understand underlying factors
The cryptocurrency market is a complex ecosystem influenced by a multitude of factors that interact to shape price trajectories. Let’s delve into some of the most significant drivers.
Technology and innovation
The crypto world is a hotbed of innovation. From Bitcoin’s foundational blockchain technology to the more recent breakthroughs in smart contracts, DeFi, and NFTs, technological advancements have been the bedrock of the industry’s growth. For instance, the Ethereum network, built on smart contract capabilities, has enabled the creation of countless decentralized applications (dApps), from financial services to gaming, expanding the crypto market’s utility and attracting a wider audience.
FUD: Fear, Uncertainty, and Doubt
Cryptocurrencies are notorious for their volatility, often driven by investor sentiment and speculation. The 2017 bull run is a prime example, where a surge in investor enthusiasm propelled prices to dizzying heights, only to be followed by a sharp correction. Social media, news cycles, and celebrity endorsements can significantly impact market sentiment, creating both opportunities and risks for investors.
Learning from history: How market sentiment affected the Terra Luna crash of 2022
The spectacular implosion of the Terra Luna ecosystem stands as a stark reminder of the risks inherent in the cryptocurrency market. The foundation of this collapse was the erosion of trust in TerraUSD (UST), a stablecoin designed to be pegged with the US dollar. As confidence waned, a mass exodus of investors ensued. This panic selling was exacerbated by the significant holdings of Binance, a major cryptocurrency exchange, in the Terra ecosystem.
Central to the Terra protocol was an algorithmic mechanism designed to stabilize UST’s price. This means that essentially, the peg was not 1:1. So, if there were 100 Lunas worth 100 USD floating in the market, there wasn’t actually 100 USD in some bank account to back it up, but only about $75 of actual money. The rest $25 was managed algorithmically through multiple means like hedging with loans, or via other cryptocurrency. However, this mechanism proved insufficient to withstand the market pressure. The subsequent crash of UST triggered a domino effect that decimated the value of Luna, Terra’s sister token, leading to a colossal loss of wealth for investors.
Bitcoin halving
Bitcoin’s halving events, which occur roughly every four years, reduce the rate at which new bitcoins are created. This mechanism controls the number of new bitcoins that can enter the market and controls supply among investors.
Halvings have historically led to changes in the cryptocurrency market. While the exact impact of each halving varies, it’s a significant event that the market closely watches. Bitcoin halvings typically coincides with rising prices in anticipation of lower mining rewards. For example, the 2020 halving coincided with a period of renewed investor interest and rising prices.
**** can add image from here about the impact of previous halvings
Fact:
After the 2020 halving, on May 11, bitcoin’s price continued to perform bullishly a full year after the event took place. This time, it rose by more than 559%, from around $8,700 in 2020 to $56,000 in 2021.
Source: CoinDesk
Regulatory landscape
Government regulations have a profound impact on the crypto market. From outright bans to permissive frameworks, regulatory policies can influence investor confidence, market liquidity, and the overall trajectory of the industry.
In 2013, China emerged as a global epicenter for Bitcoin mining and trading. The country’s early adoption, coupled with supportive regulations at the time, ignited a surge in investor interest. However, this bullish trend was abruptly halted by the catastrophic collapse of Mt. Gox, a major cryptocurrency exchange, highlighting the fragility of the nascent market and the risks associated with centralized platforms.
In 2016, the New York State Department of Financial Services (NYDFS) introduced the BitLicense, a regulatory framework aimed at bringing cryptocurrency exchanges under supervision. This move signaled a growing acceptance of the industry among traditional financial institutions and paved the way for increased institutional investment. The subsequent years witnessed a remarkable bull run, driven in part by this influx of capital. However, the euphoria was short-lived as the US Securities and Exchange Commission (SEC) began cracking down on Initial Coin Offerings (ICOs), labeling many as unregistered securities. This regulatory uncertainty triggered a market downturn.
The cryptocurrency industry has learned valuable lessons from these historical cycles. Today, regulatory clarity remains a top priority for investors and businesses alike.
3. Learning to analyze the crypto trends
The crypto market can be a rollercoaster of emotions, with prices swinging wildly. To navigate this turbulent terrain successfully, understanding market trends is essential. Let’s break down the key methods used by seasoned traders and investors to decipher the cryptic patterns of the crypto world.
Technical analysis
A popular technique that technical analysts use is known as moving averages.
- A short-term moving average is calculated by averaging the closing prices of a cryptocurrency over a relatively short period, such as 5, 10, or 20 days. This average provides a quick snapshot of recent price action.
- A long-term moving average is calculated over a longer period, such as 50, 100, or 200 days. It provides a broader perspective on the price trend.
When a short-term moving average crosses above a long-term one, it’s often seen as a bullish signal, known as a “golden cross.” Conversely, a “death cross” occurs when the short-term average dips below the long-term one, potentially indicating a bearish trend.
For instance, Bitcoin’s golden cross in 2021 was a clear signal to many that a significant price surge was on the horizon.
Fundamental analysis
While technical analysis focuses on price patterns, fundamental analysis delves into the underlying value of a cryptocurrency. It’s like examining the engine of a car to understand its performance. Here, you’re looking at factors such as the project’s whitepaper, the team behind it, partnerships, and the overall community support. A strong project with a clear roadmap and a passionate community is more likely to weather market storms.
Chainlink (LINK) is a prime example of how strong fundamentals can drive price appreciation. Its surge in value was fueled by a series of strategic partnerships with major players in the blockchain and traditional finance industries. These collaborations solidified Chainlink’s position as a leading oracle provider, connecting real-world data to smart contracts. As the demand for decentralized applications (dApps) grew, so did the need for reliable and secure oracle services, propelling LINK’s price to new heights.
Sentiment analysis
Crypto markets are heavily influenced by investor sentiment. Sentiment analysis in the crypto world involves deciphering the emotional tone and opinions expressed about cryptocurrencies, projects, or the market as a whole. It’s like measuring the overall mood of the crypto community.
Social media platforms, news outlets, and online forums are rich sources of sentiment data. To conduct a thorough sentiment analysis, one would have to gather information from various sources, including social media (Twitter, Reddit, forums), news articles, and financial blogs. One could even use natural language processing (NLP) techniques to extract and classify text into categories such as positive, negative, or neutral.
Dogecoin’s meteoric rise is a classic example of sentiment driving a market. Endorsements from celebrities sent the coin soaring, showcasing the power of social media in shaping crypto trends.
NOTE: While sentiment analysis is a valuable tool, it’s essential to use it with caution. Factors like fake news, misinformation, and market manipulation can distort sentiment data. It’s crucial to combine sentiment analysis with other technical and fundamental indicators for a comprehensive market outlook.
On-chain analysis
On-chain analysis is the process of examining data directly from a blockchain to gain insights into market trends, investor behavior, and the overall health of a cryptocurrency. It’s like studying a company’s financial statements but for a decentralized network. For example, a surge in Ethereum wallet addresses holding significant amounts of ETH could indicate growing investor confidence.
On-chain analysts pore over vast amounts of data, including:
- Transaction data: The who, what, when, and how much of every transaction on the blockchain.
- Wallet addresses: Analyzing the behavior of different wallet addresses can reveal patterns of accumulation or distribution.
- Network metrics: Data such as transaction fees, block size, and hashrate can provide clues about network activity and congestion.
- Token supply and distribution: Understanding how tokens are distributed among different wallet holders can reveal potential price pressures.
Tokenomics
Tokenomics is essentially the economics of cryptocurrencies. It refers to the financial structure of a cryptocurrency, encompassing how tokens are created, distributed, and used within a blockchain ecosystem. Understanding tokenomics is crucial for evaluating the potential of a cryptocurrency and its based on the following factors:
- Total supply: This is the maximum number of tokens that will ever exist. A limited supply can create scarcity and potentially increase value.
- Circulating supply: The number of tokens currently in circulation. This figure can fluctuate based on factors like token burning or unlocking.
- Distribution: Looking at how tokens are initially distributed among the project team, investors, and the public can give investors a sense of the long-term community health.
- Utility: What purpose does the token serve within the ecosystem? Is it used for governance, payments, or accessing specific services? A token with strong utility tends to have higher demand.
- Macro-economics: This includes factors like inflation rates, deflationary mechanisms (like when tokens are used or ‘burned’ and supply reduces causing scarcity), and economic incentives for token holders.
Liquidity analysis
Liquidity in the crypto market refers to the ease with which a cryptocurrency can be bought or sold without significantly impacting its price. It’s essentially a measure of market depth and efficiency. In a highly liquid market, large trades are less likely to cause significant price fluctuations. In contrast, low liquidity can lead to price slippage, where the actual trade price differs from the expected price.
Key indicators or a cryptocurrency’s liquidity include:
- Order book depth: This shows the number of buy and sell orders at different price levels. A deep order book indicates high liquidity, as there are many buyers and sellers ready to trade.
- Trading volume: High trading volume typically signifies a liquid market. It indicates strong interest and active participation.
- Bid-ask spread: The difference between the highest buy price (bid) and the lowest sell price (ask) is the bid-ask spread. A narrow spread indicates high liquidity, while a wide spread suggests low liquidity.
- Market capitalization: While not a direct measure of liquidity, a large market capitalization often correlates with higher liquidity.
Conclusion
We hope this blog has helped you understand the nuances of analysing market trends for crypto investments. On the face of it, things might look hard to decipher. But that this precisely where Fuze’s expertise comes in! You can easily talk to any of our experts to understand how the market is trending and how it will affect your investments or business transactions. Write to us at [email protected] for more!
