Ever wondered what makes a cryptocurrency hit record highs in price one day and fall to the bottom of the cryptocurrency market the next? The reasons are different for the various projects present on the market, but there are common features that will help you prepare for this eventuality. What is an indication of a falling rate, what are the reasons for declines in the cryptocurrency market?
The most mature asset among the various cryptocurrencies is Bitcoin. We can observe the Bitcoin exchange rate since 2010, so it is in the case of this cryptocurrency that we will get the widest view on many different examples.
2011 was Bitcoin's first golden period, its exchange rate rising from $2 to $30, achieving price parity with an ounce of silver. Unfortunately, it was also the year of a huge debacle, which saw Bitcoin's exchange rate plummet 99%, bringing its price to parity with the dollar penny.
The indirect culprit for the decline was the Mount Gox exchange - the largest cryptocurrency exchange in the world at the time - which admitted that 25,000 bitcoin had been hacked and stolen from nearly 500 customer accounts. Losses were estimated at the time at just $400,000, but the bitcoin market was still young and unknown, making any attack translate into mass panic. Despite the fact of its youth, in May 2011 Bitcoin's capitalisation was around $50 million.
The culprit again was... MT GOX! Investors were fascinated by the cryptocurrency. The mainstream media created an aura of excitement about a still new asset. Trading then became so intense that the key cryptocurrency exchange, MT GOX, was unable to cope with the volume of exchanges, causing it to quickly succumb to an error and crash. The vulnerability was quickly found by hackers, who attacked at the worst time for MT GOX.
Completely unprepared, the exchange was forced to close trading, causing prices to fall from nearly $260 to just $50.
2017 was a landmark in the history of Bitcoin. The cryptocurrency market came to a wider public awareness, many new and very interesting projects emerged and... Bitcoin climbed to the then incredible price heights of $20,000!
At the time, many skeptics of Bitcoin and cryptocurrencies spoke of a speculative bubble that could burst any moment, emptying the investment portfolios of many investors around the world. Unfortunately - the last attempt to break through the $20,000 mark occurred in the first half of January 2018, after which the exchange rate continuously fell, stopping only a month later - in February - at $7,600.
Events that potentially had a huge impact on breaking the bullish trend were the growing news of a potential Bitcoin ban in Korea, China and Japan.
3 years later, in December 2020, Bitcoin hit its price record. Investors were not about to stop there. There was more and more positive news about cryptocurrencies - PayPal accepting BTC, Tesla and MicroStrategy buying huge amounts of the cryptocurrency. The market was gripped by euphoria and there were increasing rumours of an assault on the $100,000 level.
Unfortunately, on 8 May, a breakout occurred, which saw Bitcoin fall from a record high of $60,000 to just $29,800, in just a month. Skeptics again heralded the end of cryptocurrencies - after all, the bubble had burst - but Bitcoin bounced back from the $30k mark, making another attempt to storm the psychological $50,000 mark.
The recent trend reversal has seen a number of negative developments overlap. The first, was Tesla's withdrawal of Bitcoin as a means of payment, due to Bitcoin's potentially damaging environmental impact - Elon Musk commented on the energy demands of the BTC network - which went some way to pulling the entire cryptocurrency market down.
Another factor was China, which again announced a ban on Bitcoin. The new rumours caused an exodus of Chinese miners, who took more than half of the computing power from the Bitcoin network with them for their relocation.
All these events translated into a correction of the BTC price by more than half - fortunately - the situation was not long-lasting.
You know the reasons for the biggest price corrections in Bitcoin's history. It's time to go into the details that might convince investors to pull back.
Unfavourable regulations, is one of the most significant factors that can bring the whole cryptocurrency market down. Remember what overwhelmed investor sentiment in May 2021? The news about the restrictions imposed on Bitcoin in China. Imagine what would happen to the market if restrictions were imposed in North America or Europe.
Regulators' reluctance is diminishing over time. Bitcoin is an increasingly common investment asset and Blockchain technology is increasingly being adopted in financial solutions, with the financial sector not being the only place to take full advantage of modern solutions - even non-financial sectors can benefit - education and medicine can gain a lot from blockchain solutions.
Positive news related to legislation can bring gigantic increases, the acceptance of cryptocurrencies by governments is a very important element of analysis for any investor.
The overriding principle of the cryptocurrency world is to be your own bank. This means that the level of security is as high as the user will take care of it. Unfortunately, this is not always a true statement - cryptocurrencies, like projects created by humans - have vulnerabilities.
Huge amounts of cash resources are accumulated in the projects. Thousands of investors buy tokens, depositing their money at the same time. The accumulation of such a large amount of resources in one place is a tasty morsel for hackers, who are constantly testing the security of projects and looking for potential opportunities to take over parts of them, although this is not always the main reason - sometimes it is a simple desire to sink the competition.
In 2021 we saw the biggest theft of funds in history - over $600 million was stolen from a Chinese project - a bigger theft in history was only carried out by Qusay Hussein who took over $1 Billion out of the central bank.
Attacks on the cryptocurrency market are not always so clear-cut and simple to understand. One of the most commonly used is the 51% attack, which means taking over half of the computing power present on the network. This type of attack allows for multiple legs of the blockchain to be created simultaneously, giving the attacker the ability to double spend.
During a network domination attack, blocking transactions and even other miners can also occur, allowing a mining monopoly to be built up temporarily.
Attacks can even contribute to the collapse of a cryptocurrency project, as is the case, for example, with Satoshi Vision Bitcoin (BSV), which lost up to half its value through frequent attacks. BSV's vulnerability is caused by low computing power on the network.
The solution to this for new projects seems to be another consensus - Proof of Stake - which is increasingly being used instead of the solution known for use in Bitcoin and Litecoin - Proof Of Work - which is also accused of unnecessary network complexity and higher energy requirements.
Whales are investors who own a significant amount of a particular cryptocurrency. By selling off their holdings, they are able to sink the market very quickly, as a result of which the price of the asset can instantly lose value.
Smaller investors are following the whales' movements and keeping a close eye on the movements of their funds. The primary indicator of whether to prepare for a price drop is the transfer of virtual coins from private wallets to exchanges, where a massive token offering is likely to occur.
The cryptocurrency owning community is prepared for potential attempts to drown the market. There are numerous websites and Twitter and Telegram bots that report on whale movements.
Despite the fact that smaller projects with small market capitalisation are most vulnerable to whale attacks, even giants such as Bitcoin and Ethereum are vulnerable.
You don't have to look far for an example of this - on March 15, 2021 - upon news of the movement of nearly 19,000 BTC from a private wallet to the Gemini exchange, Bitcoin's price dropped 0 10%.
One of the most popular and whale-prone cryptocurrencies is Dogecoin. Around 25% of DOGE tokens traded are held by just one mystery investor, whose actions would be able to sink Dogecoin within the few moments needed to transfer funds from a private wallet to the hot wallet of a cryptocurrency exchange.
Although we can read the actions of the whales as some kind of price manipulation, in this section we will focus on the manipulation carried out through social media, more specifically Twitter.
Every cryptocurrency bull market to date has had an influencer who has significantly impacted cryptocurrency market quotes. In late 2017 and early 2018, a significant crypto-influencer was John Mcafee, who used Twitter to pursue a Pump and Dump strategy of naming the crypto project of the week.
Once a project was selected, the project was instantly bumped up and then its price immediately returned to its starting level or fell below its pre-manipulation value. Mcaffe was held responsible for his actions - manipulating the price and ultimately causing declines on many projects.
However, despite the fact that as a cryptocurrency market we have already been through this, in 2021 Elon Musk is likely to have committed a similar act. His tool was also Twitter, through which he passed on words of support to Bitcoin and Dogecoin.
Both cryptocurrencies reacted very positively to the news of interest and support from a giant and very popular investor, but the euphoria did not last long. Elon initially spoke favourably, later changing his mind and claiming that Bitcoin is too energy intensive, which has a negative impact on our planet.
The market reacted very nervously to the news of Bitcoin's criticism and ultimately the statement was one of the factors that caused Bitcoin's price to experience a solid correction.
Despite the fact that traditional media is slowly being phasedout
in favour of social media and a decentralised form of information, it is still an important stimulator of investor sentiment.
Not every media outlet has influence, that honour is only available to elites such as The Times, The Economist and Forbes, but as generations change among investors, so do the main sources of knowledge and sentiment.
For Bitcoin, this situation has been cyclical to some extent. Bitcoin goes through Halving, the reward for mining a block halves, but the price remains as it was with the reward before Halving - many miners then stop mining and withdraw from the cryptocurrency network, causing investors to leave as well. And the price falls.
The profitability of mining is also based on factors such as the price of the mining equipment, i.e. graphics cards or specialised chips, depending on the specifications of the cryptocurrency, but also on the price of electricity and the difficulty of mining.
For working consensus-based cryptocurrencies, difficulty scales with the computing power available on the network - the more power available, the higher the difficulty and the lower the profitability.
The exchange rate of cryptocurrencies is very dynamic, which is something you need to especially keep in mind during your investments. The course of cryptocurrencies is affected by a whole bunch of factors, these listed will help you understand the basic mechanisms affecting the price of virtual money.
As you already know, reacting quickly to the exchange rate is more valuable than gold, so you should choose a cryptocurrency exchange that allows you to act instantly. Egera is a cryptocurrency exchange and bureau de change in one. If you can't afford the waiting time it takes to get your offer accepted on the exchange, list your cryptocurrencies on the exchange where they will be exchanged instantly.
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