Author: Liquid Loans / Source: https://liquidloans.medium.com/the-truth-about-what-determin

Translation: Plain Blockchain

Why do you invest in cryptocurrencies? There are various reasons why cryptocurrency investors engage in this field. Perhaps you value "decentralization," or maybe you dislike fiat currency and censorship. Regardless of your reasons, most cryptocurrency investors would rather leave with more money than they came in with. Understanding cryptocurrency prices is crucial to making your love for cryptocurrencies a profitable experience. Cryptocurrency prices are influenced by almost countless interacting factors. Let's understand some of these factors.

1. Best Cryptocurrency Investment Prices

Volatility is the reason why cryptocurrency investments are so rewarding (and risky). However, the variables are so many that they often feel unpredictable. Even weeks after a rebound or a flash crash, most people still don't understand what caused it. If you don't, they'll catch you off guard again next time. The good news is you don't need to know the price changes all the time. It all depends on the time, method, and place of your trading. As for the types of cryptocurrency prices:

• Long-term price trends are the most reliable and predictable. Short-term prices carry higher risks, although they may favor you at times, they eventually realign with long-term prices.
• Platform prices fluctuate with liquidity. Centralized exchange platforms (CEX) often have the most accurate prices, while decentralized exchange platforms (DEX) do not. Unless you are trading on platforms like Uniswap, the price difference on small DEXs may exceed 10% (you can take advantage of this through arbitrage trading).

The most reliable cryptocurrency price tracker is decentralized oracle, such as Tellor. This is because they aggregate prices from many different trading platforms to find the most common and accurate price. You can now use them by watching such price information. Assuming we are researching oracles and the mid/long-term prices of major trading platforms, let's take a look at the top 10 influencing factors.

2. Ten Factors Affecting Cryptocurrency Prices

These factors will help you predict the cryptocurrency prices of tokens such as Bitcoin and Uniswap v3, but this does not mean that these factors can explain every trend. Cryptocurrency prices are very complex: sometimes it's the second factor. Sometimes it's five at the same time. These are the ten most influential, in no particular order.

1) Token supply and demand The most influential factors are often the most common and simplest. Prices rise when more people want to buy. Prices rise when the circulating coins decrease. Supply and demand tend to balance each other out. Demand tends to rise as cryptocurrency adoption is just beginning (the number of cryptocurrency users is between 300 million and 1 billion). As for token supply, the immutability, trustlessness, and autonomy of the blockchain are very important. Otherwise, founders can create tokens out of thin air at any time. Too much supply also does not help price increases: ideally, the circulation and maximum supply should be close. Protocols use different methods to reduce existing supply, such as:

• Token burning: sending cryptocurrency to inaccessible wallet addresses.
• Halving: reducing validator block rewards by 50% after reaching a certain number of blocks.
• Classic staking: securing proof-of-stake (PoS) networks by locking tokens for interest rewards over the long term.

Cryptocurrencies like Bitcoin, which are proof-of-work (PoW) coins, are most affected by production costs. That's why prices rise after increases in electricity costs, node numbers, or hash difficulty. Note: PoW is a competition-based consensus model and reward based on computing power. The PoS model selects block winners based on token quantity, lockup length, and randomness. The consensus model determines security, decentralization, and network efficiency (see the blockchain trilemma).

2) Global economy Decentralization may give the impression that cryptocurrencies are not affected by global events. Past experiences show that this is not the case. Financial and political impacts have directly affected mid-term cryptocurrency prices (e.g., the start of Covid-19 or the Russia-Ukraine war). It can be said that in black swan events, cryptocurrencies are more vulnerable than fiat currencies. This is because investors can choose stable currencies such as Swiss francs, yen, or Norwegian krone. You can't do this with cryptocurrencies because they involve multiple countries, and almost all altcoins are related to Bitcoin or Ethereum. Fortunately, cryptocurrency prices recover faster than fiat currencies. That's why these "bad" events are often the best entry opportunities.

3) Accessibility of cryptocurrencies For those who have been using cryptocurrencies for years, it's easy to overestimate how many people have access to it. By the end of 2022, perhaps 1 billion people have bought cryptocurrencies, but how many of them are active users holding long-term positions in the market? The adoption rate is not as high as you might imagine, and improving these features will benefit cryptocurrency prices and liquidity. This does not mean that coins should rise just because they attract more people. But there should be enough entry and exit points to seamlessly convert fiat currency into cryptocurrencies. This is why such news causes short-term and long-term price increases:

• Payment processors accepting cryptocurrency payments
• Payment companies distributing Bitcoin ATMs, crypto cards, etc.
• Trading platforms offering flexible deposit and withdrawal options
• Local stores accepting Bitcoin purchases
• Sending cryptocurrencies to anyone with a non-KYC wallet

Limiting accessibility does not lower prices but slows their growth. Those who are already using cryptocurrencies are not affected as much as new adopters. For example, some countries ban cryptocurrencies, but millions of citizens still use them.

4) Infrastructure updates The changes in blue-chip cryptocurrencies are not significant because their prices are tied to utility. Due to the blockchain trilemma, secure and decentralized networks cannot scale well. This means that higher prices will increase network costs, slow down transaction speeds, reduce demand, and once again lower cryptocurrency prices. It's not that they are not valuable enough, but they cannot bear higher prices yet. Infrastructure updates reduce transaction time and costs, allowing the network to handle more people and higher token prices. For example, after adding PoS in the beacon chain update in December 2020, Ethereum broke $600 for the first time, surpassing $2,000. What do you think will happen after the merge?

5) Media announcements Media announcements are easily confused with infrastructure updates. That's because they go hand in hand and amplify each other. The difference is that media announcements are short-term and speculative. The most common response is "buy the rumor, sell the news." In the example of the merge, traders accumulated ETH for weeks. On the day of the update, most commodities are sold because there are no other reasons to prove another price surge. Like a spring, Ethereum plummeted in September 2013 (but not for long). Media announcements can be:

• Promotions (e.g., Crypto.com buying a stadium)
• Events (e.g., Binance network attack)
• Team announcements (e.g., Cardano's roadmap)

You can distinguish the differences between updates because these updates do not affect project functionality or performance. If Binance users lose $10 million in a phishing attack, this has nothing to do with BNB or the BSC chain. If Cardano releases a roadmap phase, this does not guarantee that they will fulfill these promises (or without years of delay). Media pushes up cryptocurrency prices before events, and updates cause lasting price increases.

6) Inflation of Fiat Currency Although fiat currency and cryptocurrencies are related, they are not directly proportional. Inflation of fiat currency drives up the price of cryptocurrencies. If people lose confidence in their national currency, it may accelerate the adoption and surge of cryptocurrencies. Similar to the second point, fiat currency can pose risks to cryptocurrency prices. So far, the most popular cryptocurrency pairs are based on the US dollar. This is because the US dollar is the world's reserve currency, which is advantageous for the liquidity, printing capacity, and borrowing capacity of the United States. However, by 2022, the situation suddenly changed. We are facing the financial consequences of 2020 and previous events. The United States is facing over 28 trillion US dollars of public debt, near-zero interest rates, and over 8% inflation rate (compared to the 1% inflation rate in 2020). When interest rates drop to zero, the simplest solution to debt is printing money. If new dollars are not allocated properly, inflation will devalue the currency, affecting cryptocurrencies. If a coin, like Bitcoin, is seen as a store of value, it may be considered as gold and reach new historical highs. Otherwise, it will depreciate like anything else.

7) The Law of the Heart Just as fiat currency can affect cryptocurrencies, one token can also affect another token. This is not necessarily because they are in the same ecosystem or related. According to Richard Heart, this is because they are linked through liquidity (also known as the "law of the heart"). Liquidity accelerates the adoption of cryptocurrencies (see point three) because it is the quantity of tokens that can be traded immediately. In fact, you can directly exchange two tokens, causing both token prices to change simultaneously. Similar to reserve currencies, when cryptocurrencies have more token pairs on different platforms, they become more valuable. Bitcoin has hundreds of altcoin and fiat currency pairs, so its price often rises in the long term. Similarly, PulseChain is the first Ethereum fork to inherit the complete system state. Unlike other networks, all Ethereum tokens and NFTs can be directly traded in PulseChain pairs. Therefore, there are enough reasons to expect cryptocurrency prices to rise.

8) Revenue Generation Revenue is closely related to supply (see point one) and affects security, efficiency, and consequently, prices. For example, Bitcoin generates a stable income of 20 million US dollars per day through 1 million mining nodes (note that miners may have multiple nodes). By around 2018, the income was already so high, which explains why there are now more validators. Therefore, Bitcoin becomes more decentralized and secure, and more users have confidence in holding it. Revenue also contributes to the rise in protocol and dApp token prices. DeFi platforms can use revenue to increase APY rewards to attract users and improve decentralization. Or they can invest it in features that enhance utility, ultimately raising prices. Platform revenue should not be confused with investor returns. High-yield platforms still cannot generate revenue when rewards exceed service fees. If interest rewards come from inflation or later "investors," the token price will not be sustained.

9) Bitcoin-Related Lag The prices of most cryptocurrencies are related to the price of Bitcoin, but they do not fluctuate simultaneously. When market trends change, investors tend to trade the largest tokens first. These blue-chip projects have large and stable trading volumes, making them safer when trends reverse. Assuming this trend continues, they will profit from these cryptocurrencies and then reinvest in other cryptocurrencies that have not yet risen. This can be any token in the top 50 on CoinMarketCap. Tokens with lower trading volumes will reflect the same price trajectory as Bitcoin after a lag, but amplified. If Bitcoin rises by 10%, these assets may rise by 100%. This is beneficial, but also dangerous, as a 30% drop in Bitcoin is enough to cause small coins to lose 90% or be completely liquidated. The smaller the trading volume, the greater the lag, typically 1 to 3 weeks. If Bitcoin's direction reverses before other microcap updates, the lag will be canceled and the price will remain unchanged. However, if a token is closely related to the ecosystem of another token (such as TraderJoe on Avalanche), the price can reflect immediately.

10) Cryptocurrency Price Manipulation Finally, we cannot ignore the reality of price manipulation. Although blockchain may be decentralized, the cryptocurrency market is not. Trading may be a zero-sum game, where the maximum benefit of others is to confuse and make you lose money (at least in prediction markets such as futures and options). The larger your investment, the more complex the emotions, which can lead to mistakes. Examples of manipulation include:

• Pump and dump groups artificially inflating the price of worthless tokens for sale
• Using media news to rationalize potential pumps
• Trading with oneself, faking trading volume (wash trading)
• Creating bull and bear traps to trigger stop-losses and short squeezes before actual rebounds (or crashes)

This not only involves understanding the factors that affect cryptocurrency prices but also understanding how other factors affect it. If many people believe that Bitcoin will reach a specific price, trading at a price lower than a thousand dollars may be safer in case it reverses.

3. Five Reasons for Cryptocurrency Price Changes

The top ten factors are external variables that can change the direction of cryptocurrency prices. However, cryptocurrency prices also affect themselves because traders change their positions based on market direction. Therefore, assuming these ten factors do not intervene, cryptocurrency prices will still change. Imagine a token like Ethereum rising tenfold due to demand and speculation. What will happen is:

1) Network Costs Increase Network fees are paid in the native currency (ETH), so as long as the token rises, network fees will increase accordingly. If the fee per transaction is between 0.01 US dollars and 0.10 US dollars, there is no problem. If the average price is higher than 10 US dollars, then a 10-fold increase in price will become 100 US dollars. Once the price rises, inefficient fees will become paralyzed. Users do not want to pay these fees, so they will stop using the network until the price drops. Tokens with large ecosystems and low scalability blockchains are the most susceptible to price drops.

2) Trading Volume Cycles If the price of Bitcoin or Ethereum rises for several months without a crash, eventually all cryptocurrency projects will mimic it. As investors gain confidence, they will research small-batch tokens with long-term potential. Small projects can rise 10 to 100 times in a few weeks, which is more attractive than the return on investment of the top 10 tokens. The demand for Bitcoin is dispersed into smaller projects with a lag of several weeks. It enters the top 50 tokens, ecosystem tokens, Metaverse tokens, NFTs, and finally ends with meme tokens. Profitable meme coins often herald the end of the cycle, followed by a Bitcoin crash, and everyone reinvests in blue-chip cryptocurrencies.

3) Overall Market Direction Market conditions change investor and price behavior. For example, the goal of a bear market is to buy low and avoid losses. Selling pressure is high, so any price increase may lead to a large amount of selling instead of parabolic growth. Selling on the rise and waiting on the fall is common. The "goal" of a bull market is to take profits first. Because if you are late, you will be unprepared for the upcoming bear market. For long-term bulls, selling is replaced by holding, and it seems like a good deal to buy anything at any time. But is it really?

4) Profit-Taking and Reinvestment Have you ever felt that the price trend is opposite to what you planned? Your prediction may not necessarily be wrong. It's just that earlier investors can profit from small price changes. If someone else takes profits first, it may trigger stop-loss orders for others, causing you to lose money overnight. If you consider buying a token with a rising price, the focus is not on whether it will continue to rise. It's about how many people may have bought before you and are ready to exit.

5) Volume and Network Congestion Price fluctuations may attract high-frequency traders and cause network overload. As larger investors enter the market, smaller trades lose priority. If you don't want your orders to be delayed for hours, you must pay additional fees to increase priority. Congestion and network fees are related, and they both can lower cryptocurrency prices. How to profit from any cryptocurrency price When you wait for the right price to buy, countless other traders are also waiting. When everyone is waiting to buy low and sell high, it's easy to predict (and manipulate). But there are profitable methods regardless of price direction. When prices fall, you can profit by using futures, options, and short positions. For example, if you believe a merger will cause Ethereum to crash, you can open an ETH short and profit from the crash. Indeed. If it's a boring sideways market, now is the best time to use DeFi tools. Because when token pairs don't change, the yield is highest. This is an opportunity to accumulate funds without buying through collateral and borrowing. When you can profit anywhere, you are always ready to enjoy the best cryptocurrency prices. You will have enough profit to exit before the bearish reversal, and you will have enough funds to buy at the bottom.

4. Frequently Asked Questions

1) Can cryptocurrency prices go to zero? Cryptocurrency prices will not go to zero, not because they are worthless, but due to security issues. It could be a blockchain with a consensus mechanism error, insufficient validators, or an imbalance in token distribution. Even after cryptocurrency audits, network attackers sometimes find code errors that cause infinite money faults. Research to avoid these events, or at least diversify enough.

2) Will cryptocurrency prices continue to rise? Due to their intrinsic value, cryptocurrency prices continue to rise in the long term. Decades from now, many tokens may not exist, and the leading tokens we know of may be replaced. But cryptocurrencies will not disappear: even 100 years from now, society may still use some form of blockchain system. If you hold widely adopted cryptocurrencies like Ethereum, their prices will inevitably rise.

3) Should I compare cryptocurrency prices to market capitalization? Cryptocurrency prices multiplied by token supply equals market capitalization. Contrary to popular belief, it has nothing to do with company size or price predictions. Developers may change token supply to any amount they want, and if the supply doesn't change, observing price history will provide the same information.

4) Can you profit from cryptocurrency prices without selling? Not only can you, but you should. DeFi services allow you to hold tokens on the network/protocol while extracting value. You can profit through staking, borrowing, or yield farming without selling your initial amount. In this way, users can help their tokens gain liquidity and a stable floor price. Therefore, if you want to sell, the price may be higher than your entry price. Plus, all the rewards obtained during this process.

5) Should I try to predict cryptocurrency prices? You should predict cryptocurrency prices based on your trading style. If your strategy is long-term holding, you must predict/analyze which tokens have the greatest utility/value/price potential. For high-frequency trading, prediction is technical and news analysis. In futures and options, prediction is betting and taking asymmetric risks (either small loss or big win). You cannot always predict all cryptocurrency prices. So you should choose a strategy that favors your probabilities. Dollar-cost averaging, holding, and value investing are time-tested and recommended investment methods.

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