Overview
OverviewIn this artice we will try to understand how ecomic events can influence the cryptocurrency market.
You probably must have heard that the cryptocurrency world is the latest gold mine. The value of Ethereum and Bitcoins- the two leading cryptocurrencies keeps increasing almost on a daily basis.
If you are yet to join the train, you would already know by now that the time to invest in cryptocurrencies has been due since forever. That is not to say it is too late though. The projections for the future still look very encouraging and there is still a lot of untapped potential in the crypto market.
You, however, must realize that the cryptocurrency market is most famous for its unpredictability. Bizarre rises and falls in prices have been experienced in times past, and there is absolutely nobody that can correctly predict such won’t occur again. Like all other forms of money, cryptocurrency is not immune to economic forces. Rises and falls in value are majorly dictated by the market forces of demand and supply, which is in turn influenced by events that occur in leading economies. Here of some economic events that significantly affect cryptocurrency prices.
Legalization
Perhaps one of the most significant events in the history of cryptocurrencies is the legalization of bitcoins in Japan. China originally had the most traded volume of Bitcoins owing to their less strict financial regulations, and probably their population. This status has changed though with the legalization of BTC in Japan. Japan swiftly moved to displace China as the world’s largest Bitcoin market.
The law which came into effect on 1st of April 2017 accepts that Bitcoins and other cryptocurrencies have asset-like values and can be used as payment for goods and services that can be transferred by electronic data systems. Within a very short period of time, the value of Bitcoins moved up by more than 80%.
With legalization discussions also in the works in countries such as India, China, and even America, the cryptocurrency market seems to be in a very good shape. If legalization in this countries eventually comes to fruition, it is sure to lead to an increase in demand and consequently, a rise in value.
ejection of Bitcoin Exchange Traded Fund application
Had the application been otherwise treated, the value of Bitcoins may well have reached four figures by now. The Winklevoss brother filed with the SEC to create an exchange-traded fund tied to the price of Bitcoins. The Application was however rejected sometimes in March and the rejection had a great influence on the value of Bitcoins. The value embarked on a free fall immediately after the announcement, losing about 15% within minutes.
Although the value has recovered since then, we were all made well aware of the influence a single economic decision could have on the value of cryptocurrencies. Had the ETF been accepted, hedge funds managers, stock traders or anyone at all would have been allowed to purchase Bitcoin directly on the stock market. This simplifies the earlier process of first signing up on an exchange having to wait before the Bitcoins are transferred after payment.
The major reason given by the SEC for the rejection is the unregulated nature of the markets where Bitcoins are currently traded. The SEC is expected to review several other applications and a favorable decision on any of them is a potential game-changer for the value of cryptocurrencies.
Tax treatment
Many countries have moved to categorizing cryptocurrencies as assets and as such, they are considered taxable. This has had mixed effects on the value of these cryptocurrencies, most especially Bitcoins. On the bright side, official recognition of Bitcoins in any form leads to an increase in its popularity and possibly demand, which in turn leads to a surge in its value.
On the downside, however, categorizing cryptocurrency as taxable may be perceived by many as a pointer that many stricter regulations may come along soon enough. It should be borne in mind that one of the major strong points of cryptocurrency presently is its general freedom from government regulations.
Additionally, listing cryptocurrency as a property implies additional complexities for prospective users. The current tax law would mean that users have to record the market value of the cryptocurrency before trading with it, a complexity some users may prefer to avoid altogether.
As long as the ultimate goal of any cryptocurrency is to achieve mass adoption, moves that would hinder even a fraction from accepting the currency would be detrimental to its market value in the long run.
Large businesses dumping to fiat
The fact that Cryptocurrencies are yet to enjoy widespread adoption also affects their value. So many payments still can’t be made through cryptos, most employees won’t enjoy being paid in cryptos and most governments are yet to recognize cryptos as a means of payment for such things as taxes, fines or any payment for that matter.
The consequence of this is that even if companies invest in a cryptocurrency, say Bitcoins and end up acquiring a huge amount, such companies would need to convert the cryptocurrency into fiat money before most of their pertinent financial obligations can be fulfilled. If a company decides to ‘dump’ a huge volume of Bitcoins at a time or many companies are dumping together, it could look like a panic sell which may lead to a drop in the price of Bitcoins and other cryptocurrencies.
Devaluation
Devaluation of currencies with high cryptocurrency trade volume would lead to an increase in demand for crypto currencies and consequently, an increase in its value. This is because investors would look to the cryptocurrency as a store of value. Though it makes sense that the price of Bitcoin against the specific currency would be most affected, the huge trade volume held by the country would inevitably affect global prices.
An example is seen with the devaluation of the Chinese Yuan in 2015. China at that point boasted the highest Bitcoin trade volume and the effect of the devaluation was clearly visible even on the global charts. The price of Chinese Yuan against Bitcoins kept pushing higher with strong buying in evidence. This also had an effect on the global market as Bitcoin prices also increased on the global scene. If a similar devaluation was to occur in another country with a high trade volume say Japan, expect a sharp increase in global prices.
Press influence on perception
The populace typically reacts to information fed by the press and the value of cryptocurrencies is greatly influenced by what the press writes about them. Currently, mass adoption of cryptocurrencies is hampered by bad press. News events that scare current and potential users, as well as releases about threats of government regulation, create a negative perception about these currencies which consequently leads to a reduction in demand and value.
Cryptocurrency news that has enjoyed the widest reporting include the fall of Mt. Gox and the widespread use of Bitcoins in the online drug market- Silk Road This power however seemingly exerts minimal influence due to the efforts being made by stakeholders in the business including currency owners, exchanges, wallet handlers etc.
The stakeholders strive to drive away the negative perceptions by reporting favorable news that encourages investment although their major sphere of influence remains the internet. This technique seems to be working a fair number of internet savvy individuals get their news from these sources. To attract many big names, however, widespread positive reporting remains a major key.
Ransomware attack
Although not the typical economic event, the widespread ransomware attack that occurred earlier this year has a major influence on the price of cryptocurrencies. The hackers demanded to be paid in Bitcoins (as this would be near impossible to trace) and a surge in the price of Bitcoins was observed. Asides increasing immediate demand for the cryptocurrency, the event also led to an increase in popularity of Bitcoins which had an overall positive effect on its prices.
Admittedly, the cryptocurrency market may best be described as erratic, it is not totally immune to prediction and is sure affected by some significant events. The key lies in a trader’s ability to correctly anticipate the immediate and overall effects of such events in order to make informed decisions about when to buy or sell. In the words of Paul Tudor Jones. ‘the most important rule of trading is to play good defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Following this rule may just be the beginning of breakthroughs in your cryptocurrency trading journey.