What, in fact, has an impact on the prices of cryptocurrencies?

What are the most popular myths about this subject and what should be done to be able to earn money on cryptocurrency trade? I will try to answer these (and other) questions in this article.

Despite small changes in the price of bitcoin as well as other most popular cryptocurrencies, it cannot be said that not much happened in the crypto world. There is practically no week in which we will not learn about some fraud, we will not hear another forecast of an analyst who predicts astronomical bitcoin rates, we will not experience ups and downs associated with an attempt to open ETF (Exchange Traded Fund) to BTC or we will not hear about new developments in crypto world like the blockchain prediction.

This last topic, in particular, has recently attracted my attention, and exactly what people think (say) about it. This is interesting mainly because it gives me some insight into how the average investor in this market thinks and counts on. This helps me to decide whether the current bitcoin price is likely to rise and whether, therefore, it is worth investing now in a cryptovalute or not.

But let’s start from the beginning.

What really affects the price of a cryptocurrency?

In order to answer this question, we must first think about what money is? In a large simplification, money is a means of exchange. Since money is a means of exchange, the price of a given item is only a visualisation of the rate at which the two parties in the transaction process (seller and buyer) are ready to “strike the market”.

It should also be remembered that we have different types of markets in which these transactions are carried out. In shops, online shops, shopping malls or other similar places we have to deal with a situation in which it is the seller who sets the price of the product and this price does not change too often. The buyer can only decide whether to accept it or not.

It looks completely different on stock exchanges and auction services. There, the price changes constantly, negotiations are a normal part of the transaction and the price is set by both parties (seller and buyer).

Of course, we have different types of markets – financial instruments market (e.g. stocks, bonds, crypto), real estate, commodities, etc. and participants in those markets.

The market we are most interested in is, of course, the financial market, which in its construction is a kind of stock exchange. Since the crypto market is an exchange and the price of goods on the exchange is determined by both parties to the transaction, one should then ask the question about who the participants of the financial market are?

In a big simplification on the market we have 3 groups of participants:

  1. Institutional investors (banks, investment funds, etc.)
  2. Independent investors (such as you and me) and …
  3. Algorithms (in other words, computers)

Especially the first and the last group is important, but about it in a moment. In their simplest form, prices in each market are shaped by comparing supply and demand.

If the demand for a given good exceeds its supply, sellers sell their goods to the one who gives the “most” for it and prices rise. Conversely, prices fall and when there is a relative balance between supply and demand on the market, prices remain relatively stable.

As an investor I try to look for inequalities. A situation where supply is greater than demand and evidence that may indicate that this situation will change in the future.

Here we come to the first myth connected with investing, namely that there must be more buyers on the market than sellers.

In fact, the number of market participants does not matter. This transaction volume is important because one institutional investor can concentrate products from hundreds like not thousands of independent (small) sellers.

At present, investors on the cryptocurrency market buy tokens for 2 reasons:

  1. Speculate (they count on the fact that in the future a given token will be worth more)
  2. They are users of a given ecosystem (usually developers).

Group “a” far surpasses group “b”, which is why, at present, announcements of new fantastic features in a given project are not received by the market as optimistic as the potential information about ETF’s opening.

Bitcoin ETF

Many people are now surprised by this, because earlier (when we set new price records) every single announcement of new features often translated into new price increases and was received with a hurricane of optimism.

What has changed?

Market orientation …. in other words, the emotions that accompany market participants. Yes, it is not the demand and supply itself (although it is also important), it is not the new functions or the opening (or not) of the ETF itself that affects the price of a given cryptovalute …. only the emotions of market participants.

The recent rejection of all applications for ETFs for bitumen did not have a significant impact on its price, as the market predicted this. This did not cause much emotion and therefore did not have a significant impact on the price.

If we look again at market participants and analyze them in terms of emotions, we will see that :

  • Institutional investors are characterised by moderate emotions
  • Individual investors are very emotional
  • Algorithms (computers) are completely devoid of emotions

          It is important because algorithms (computers) as such will not change the existing trend,              but will only intensify it. Therefore, it is up to the “real” market participants (the more or less     emotional ones) whether a given trend will change.

The current equilibrium in supply and demand will not change “from yes”. You will need a stimulus that will help to change the attitude of its participants from “fear” to “optimism”. That is why he personally does not believe in all the sudden growth forecasts, preferably before the end of the year.

The attitude of the market will change for institutional investors, whether through market manipulation (e.g. Pump&Dump groups, Fake News, etc.), or by placing a large number of transactions, which can then cause investment algorithms to start behaving similarly to them and this can kidnap individual investors…. and we will see a change in the trend.

In my opinion, however, this will not happen without some decisive catalyst, and this one will not be associated with the cryptocurrencies themselves (ETF or new applications) and the whole financial market as such.

Here we will also refer to myth number 2, “Technical analysis will tell you the truth”.

Growth chart

I systematically see people who base their investment decisions only on technical analysis of charts. The truth is that price charts are only a record of trading history and this has no direct impact on prices in the future.

Technical analysis may help you determine the most likely situation, but it will not give a 100% guarantee that this will be the case.

This brings us to a key question, namely….

What to do to be able to effectively earn money from the crypto trade?

Unfortunately, there is no one-size-fits-all answer to this question. In my opinion, you have to clearly define what type of investor you are.

Do you invest in the short or long term?

Do you want to try to use the “momentum” and be a swing trader changing from one cryptocurrency to another, trying to go with the current?

Or maybe you are interested in day trading and “scalping” small producers, which over time can give quite decent profits?

Each of these investors will have different goals and a different strategy of action, but this is a topic for a completely separate article.

The only thing I can do is for you:

To invest funds that you may lose. This will remove the “price” pressure from you and allow you to plan your movements more strategically.

Define your strategy, stick to it and try to find the situation which in your opinion gives the highest probability of success. Then just act.

Never make investment decisions because someone else has said something.

Compsmag