Supply and Demand
The basic principle of supply and demand is what drives any freely traded market, and cryptocurrencies are no exception. When there is a high demand for a coin and not enough supply to fulfill that demand, the price tends to increase. Conversely, when there is an excess supply of a coin and a lower demand for it, the price tends to decrease. This constant search for equilibrium is what causes the price of cryptocurrencies to fluctuate.
In the case of Bitcoin, the factor that sets it apart from traditional market is its limited supply. There will only ever be 21 million Bitcoins in existence, which makes it a scarce asset. This scarcity, combined with the large amounts of fiat currency that could potentially flow into cryptocurrency markets, leads to high volatility in the market. However, over time, this volatility tends to die down, and balance is achieved. A large wall of traditional fiat money potentially coming into a tiny asset class called cryptocurrency means that the Bitcoin price will not always go up. Instead, there are huge swings of volatility, which is generally in the upward direction. As time passes, volatility dies down, and balance is found.
The Role of the Media and Big Players
The media plays a significant role in shaping demand for cryptocurrencies. News flow and media coverage create hype around certain coins, which can attract new investors. Conversely, negative news can create fear, uncertainty, and doubt, causing the average investor to sell.
However, the big players in the market, like institutions and other whales, think differently. In the crypto markets, where there are fewer regulations and less liquidity to fill big orders, a big player can only fill their big buys when others are selling. For example, during the 2020 COVID crash, institutions and other big whales of the market had a chance to fill large orders, and once all the panic sellers were exhausted, the price was ready to rocket from $4,000 all the way to $64,000.
Looking back at the news when the price was around the top of $64,000, everyone was hyping up crypto and calling for the price to go to the moon and beyond. That gave the big players a chance to sell large amounts to the less knowledgeable of the market without crashing the price. Once the small buyers were exhausted and big players sold, the price started to crash.
The Bleak Reality
While some may call this market manipulation, it is simply the reality of investing in cryptocurrency. It is nothing personal either; filling large orders requires someone to take the other side of that trade. Usually, that other side will be the masses of people following the media and the popular influencers. To navigate the market successfully, it is important to be aware of these big players and their strategies. Warren Buffett is famous for saying, “Be fearful when others are greedy and be greedy when others are fearful.” This means that smart investors take advantage of market trends and are not afraid to go against the crowd.
Conclusion:
In conclusion, the cryptocurrency market is driven by the basic economic principles of supply and demand. However, due to the unique characteristics of the cryptocurrency market, such as limited supply and lack of regulation, the market is highly volatile and subject to manipulation by big players. Therefore, it is essential to have a sound understanding of the market dynamics and do proper research before investing in cryptocurrencies. By following the advice of seasoned investors, one can stay ahead of the curve and make wise investment decisions in this exciting yet unpredictable market. As the cryptocurrency market continues to evolve, it will be interesting to see how it adapts to changing economic conditions and regulatory frameworks.
