The crypto market is a financial space characterized by its extreme volatility. Sudden movements in the price of cryptocurrencies are common, and the reasons for the rise and fall of cryptocurrencies are wide-ranging.
The reason for cryptocurrency price movements
In traditional markets, the law of supply and demand largely governs asset prices. In the case of crypto-assets, this concept also determines their price fluctuations, but many other factors must be taken into account.
Among other variables, the influence of crypto exchange platforms is significant, as well as the strength of fundamental analysis, rumors, news and information on social media.
Next, we will examine in detail the main reasons why cryptocurrencies rise and fall.
In general, if a relevant exchange (such as Binance, Coinbase, or Kraken) lists a digital asset, trading volume is likely to increase. With more investors trading a particular crypto, we will see more price movement.
Virtually all existing exchanges allow trading with Bitcoin and Ethereum. therefore, its trading volume is enormous and its prices undergo constant, sometimes impressive movements.
Therefore, the exchanges condition the demand, because when it increases, if the rest of the parameters remain stable, this generates an increase in the price.
Beyond the above, the mere news that a major exchange will start trading a particular cryptocurrency usually causes its price to rise sharply.
Adoption of cryptocurrencies
Bitcoin wouldn’t be as popular without the widespread adoption it is enjoying. The same goes for some altcoins: the higher the utility, the higher the demand. This results in a more congested network.
We are talking about more trading volume, more trading and of course increased volatility.
It also increases the adoption of certain cryptocurrencies when they are needed to be able to use certain applications, such as decentralized exchanges.
A few examples are the price increase compared to last year that occurred on smart contract platforms such as Ethereum (ETH), Solana (SOL) or Avalanche (AVAX). Much of this price increase is due to the increase in users using various Defi (decentralized finance) platforms or increased investment in NFTs (non-fungible tokens).
After the approval of the law of Bukele in El Salvador, by which Bitcoin has become legal tender, we saw a sudden movement in the price of BTC. It collapsed the same day the law was enacted. We were able to analyze whether the typical «buy the rumor and sell the information» effect occurred.
This is a phenomenon that partly explains why cryptocurrencies rise and fall, but perhaps it would be better to focus on the question of legal texts; specifically, in the regulations.
The clout of international regulators can sink large-cap cryptos. The SEC has demonstrated this with the Ripple token, which does not raise its head due to the lawsuit filed by the commission in December 2020.
On the other hand, the approval of laws can be positive for the price of crypto assets. We saw it after the promulgation of the American presidential decree on digital assets, signed by Biden in the midst of the Russian-Ukrainian geopolitical crisis.
Project development and improvements
The confidence that a project conveys will always have a positive impact on the price of its token. A team with a defined and extended trajectory, which follows the previously marked path, which meets deadlines, which evolves its network… will most likely be able to drive the price of crypto up.
Another factor that influences the value of tokens, related to the technical aspect, is the algorithm used for the operation of the network. A good example is Ethereum’s move from PoW to PoS.
All it took for Elon Musk to put the word «Bitcoin» in his Twitter bio was to drive up its price. The same thing happened when he openly came out in favor of Dogecoin: the price of the meme skyrocketed.
Pumping and dumping crypto is so easy for some celebrities, entrepreneurs, and influencers with extreme media power. Many news reports, in addition to gossip and social media threads, can be decisive in predicting whether the price of a cryptocurrency will rise or fall.
The situation of the rest of the markets
It is normal to see altcoins crash when BTC takes a big drop. If the Nakamoto coin goes up, large cap cryptos will also go up. And what happens when traditional markets fall?
In a way, they are interconnected. BTC does not fly freely. There are enough examples to prove it, such as the general collapse of markets after the outbreak of the pandemic in 2020.
Recently, the Russian-Ukrainian war conflict has once again made it clear that the crypto market is also affected by international crises affecting major financial markets.
The fact is that, as happened in March 2020 (and now it also seems to be the case), the crypto market has some capacity for immediate recovery that traditional markets do not show.
Tokenomics: saving symbols
The token economy itself has an impact on the price movement of digital assets. Variables such as inflation, cost of production, type of token or form of supply are determining factors in the evolution of prices.
In the case of inflation, Bitcoin was designed as a deflationary project. At some point, there will be a set number of units and no more can be mined. Inflation is not a concern for investors, who will be able to profit from the increase in demand relative to the fixed supply.
In fact, the fear among investors is that the deflationary pattern is BTC’s Achilles’ heel. When miners don’t receive rewards (because their activity will stop) and holders only aim to accumulate more and more bitcoins… will the price go down due to less actual usage of the BTC?
These are the main variables that affect the price of digital assets. They explain why cryptocurrencies rise and fall, but shouldn’t be taken as determining or general factors: each cryptocurrency has its own specific circumstances, although many mimic the rise and fall of BTC.
On the other hand, it is easy to explain the movement of the markets a posteriori using these variables. But we must never forget that we can only partially predict the behavior of an asset. Knowing why the price of crypto moves should help you design strategies with different alternatives depending on whether they are going up or down.