If you’ve been following the Bitcoin price for a while, you’ve likely noted that it keeps shifting significantly. In one month, it may be operating at a high point, and then it plummets within 24 hours. The changes can also be positive and have a good or bad effect on your assets depending on your investment strategy. But what exactly causes these huge shifts in prices?
Today, we’ll look at the main causes.
Economic Events
The crypto market is not independent. In fact, it significantly depends on traditional markets as investors use it as a form of value storage or for trading. If external economic events have a significant effect on finances, this naturally expands to the crypto market. People may sell to regain cash or invest more to make extra profit.
Examples of economic events that may affect Bitcoin and other crypto prices are recessions, high inflation, and political instability. These situations make all markets unstable, so the first thing investors do is try and secure the value of their liquid assets. Those avoiding a devaluation of their currency can invest heavily in Bitcoin, leading to a surge in the Bitcoin price.
Another significant factor here is central bank policies. If a major central bank lowers its interest rates to stimulate economic growth, this can weaken the national currency, leading to the adoption of Bitcoin. However, if the rates increase to arrest inflation, investors can sell off their assets to repay loans, leading to a sudden price crash.
Market Sentiment and News Events
Investors in the crypto market are always on the lookout for the latest news events to react and make a profit or avoid losses. This can sometimes go the extreme, with a fake news tweet causing a market reaction. If investors feel confident in a crypto asset, they buy it to benefit from the expected increase in value, and vice versa.
A good example is a Bitcoin halving event. These events reduce the amount of Bitcoin entering the market, creating scarcity. Since past events have led to a price increase, investors can buy in bulk before or after a halving event.
The same effect is also brought by positive or negative news. If a major corporation announces that it will start accepting Bitcoin, more people will buy it. If there is news of hacking incidents or a looming regulatory crackdown, people will sell in fear.
Market Manipulation
While traditional markets are heavily regulated, the crypto market isn’t. This means that it’s susceptible to artificial price movements that don’t reflect the coin’s true value.
One of the popular techniques used here is the “pump and dump” scheme. In this case, several investors collude to inflate the price. They can do this by buying huge quantities in a short time, which will create the illusion of a price surge. They may also manipulate the market sentiment with fake news. When they make a good profit, they then sell off their assets, leading to a price crash.
“Bitcoin Whales” also play a significant part. These are individuals or entities that hold huge amounts of Bitcoin, sometimes in the billions of dollars. If they decide to sell off a large portion of their holdings suddenly, this can create an unintentional price drop. However, the rest of the market can interpret this as a looming crash and sell off their assets, leading to further price drops.
New Regulatory Changes
The regulations surrounding crypto are not yet stable. When a government announces new rules or policies regarding crypto, this can cause an immediate price change, either positive or negative.
For example, if a government announces stricter measures to deal with money laundering, the uncertainty can lead to sell-offs.
The regulations can also be positive. For example, the January 2024 approval of Bitcoin ETFs in the US boosted investor confidence and brought new ones. The same happened when El Salvador became the first country to adopt Bitcoin as legal tender in 2021.
As an investor, staying updated with these events can help you identify opportunities and take advantage.