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Understanding Cryptocurrency Price Factors

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By now everyone is well aware of the incredible run that the cryptocurrency market has had this year, with bitcoin recently smashing past the $10,000 mark. Despite this however, the price journey of cryptocurrencies such as bitcoin is not simply just a vertical path upwards. The price of bitcoin experienced both major lows and highs, which were caused by a variety of factors. This article will take an in-depth look at how these factors can affect the price of bitcoin and other cryptocurrencies alike.

It is first important to make a clear distinction between the price and value of a cryptocurrency. The price of any cryptocurrency is simply the monetary cost of purchasing it, whereas the value of a cryptocurrency is its perceived benefits and usefulness. The price of a cryptocurrency is not tied to its value but instead, its perceived value. It is from this perception of value that many of the factors determining the price of a cryptocurrency usually operates.

Supply & Demand

Starting from the basics, the supply and demand of any cryptocurrency will undoubtedly influence its price. A cryptocurrency that has a lot of supply, but little demand will see very little price movement. Whereas, a cryptocurrency with a limited supply, but is very sought after will see significant price movement upwards. To some extent, this particular factor is the driving force of bitcoin’s upward trajectory. The circulating supply of bitcoin is approximately 16.7 million,this is relatively low compared to the sheer amount of bitcoin that buyers are demanding. Because of the higher levels of demand relative to its supply, the price of bitcoin increases to reflect this relationship.

Utility

Ultimately, many people will buy and sell a cryptocurrency based on its utility. In this context, utility simply means the usefulness of something. In general, the more useful a cryptocurrency is in solving a problem, the more likely that it will be bought, because a cryptocurrency that is seen as useful will also be perceived as being valuable. Take Ethereum for example, Ethereum is an open platform technology that allows developers to build and launch their very own decentralized applications (dapps).

Many people see the Ethereum project as being useful, because the project has produced some very interesting dapps that try and solve certain problems, such as TenX with cryptocurrency spending, or EtherTweet with a censorship resistant social media platform. This in turn presents Ethereum as being a much more valuable project, because not only does Ethereum make these dapps possible, but these dapps will require the purchasing of ETH (Ethereum’s cryptocurrency) to build them in the first place, causing an upward pressure in its price.

Utility is one of the most important factors to look for when deciding to invest in a cryptocurrency. If a cryptocurrency solves an issue i.e. it is extremely useful, but that is not reflected in its price, then that cryptocurrency is undervalued. This is a good indicator that, regardless of its undervalued price now, once the market begins to realize just how important the coin is, then it is likely that the cryptocurrency will see an eventual increase in its price.

Market Sentiment

Positive or negative market news can also be a deciding factor as to if a coin’s price moves up or down. The reason for this is that, depending on the market news, sentiment as to the perceived value of a coin can change. A good illustration of this point is Mt. Gox. For those that do not know, Mt. Gox was a bitcoin exchange that was based in Japan. Mt. Gox played an integral part of the bitcoin ecosystem, handling around 70% of all bitcoin transactions worldwide. However, following a security breach that resulted in about 850,000 bitcoins either being lost or stolen, Mt. Gox suspended trading and went into liquidation. During the tumultuous period face by Mt. Gox, bitcoin prices fell by 36%, reflecting negative market sentiment surrounding bitcoin at that time. In sum, the perceived value of bitcoin was negatively impacted as a direct result of the Mt. Gox incident.

Despite the sell-off that occurred during and following the aftermath of Mt. Gox, bitcoin was obviously able to recover. This scenario demonstrates the power of the utility factor. Despite the sell-off that bitcoin experienced, bitcoin’s utility remained the same. bitcoin still solved an important problem, it was a borderless payment system that could facilitate instantaneous transactions worldwide, at a very low cost. The market again gradually realized the usefulness of this, and subsequently bought back into bitcoin. The utility of a cryptocurrency has one of the most important long-term impacts on the price of a cryptocurrency. It will only be the cryptocurrencies that solve an important problem well that will remain competitive in the marketplace.

Mining Difficulty

For proof-of-work (PoW) blockchains such as bitcoin, the mining difficulty of a coin can have an effect on its price. In brief, mining difficulty is simply the measure of how difficult it is to find a hash value below a given target hash. A thorough explanation of proof-of-work and mining difficulty can be found here. Initially, a low mining difficulty indicates that a cryptocurrency is easy to mine, which means that it is easier to increase the supply of that cryptocurrency, which would place a down pressure on its price. However, increased mining difficulty means that it is harder to increase the supply of the cryptocurrency, which, when compared to rising demand, may cause an upward movement in the price of the cryptocurrency. This factor requires that you have technical knowledge of the cryptocurrency that you may choose to invest in, as it may play a vital role in its price movements in the future.  

In conclusion, these are just some of the core factors that can influence a cryptocurrency’s price movement. What is important to take away from this article, is that price movements are, to a considerable extent, tied to the perceived value of the coin in the marketplace. Any event that may occur, either good or bad, will affect the perceived value of a cryptocurrency, which will subsequently affect its price. This is an important principle that the cryptocurrency market largely currently operates on.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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5 stars on average, based on 1 rated postsBisade Asolo is the co-founder of Mycryptopedia.com, a website dedicated to teaching everyone about cryptocurrency and blockchain. He believes that cryptocurrency and blockchain is revolutionary and can't wait to see how it will disrupt our lives. He also can't wait to buy his first Lambo and go to the moon!




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Crypto Kingmakers: Evaluating Exchange Listings

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Cryptocurrency exchanges have long been considered potential ‘kingmakers’ for up and coming ICO projects both pre and post launch of crowd-funding rounds owing to reputation, trading volume and community value, as well as prior experience of shrewd coin selection.

Cryptocurrency exchanges are (at a base level) responsible for fostering liquidity in the market whilst providing competitive choices for investment consumers in the market: both with regards to the exchanges themselves as well as the diversity of the coins they offer for trade.

When a new token is announced for listing on popular platforms such as Coinbase or Binance for example: trends show an increase on interest as represented by value and investment potential. Whether this offsets the prohibitively high cost of entry incurred by such service providers however is yet to be proven.

Separating the Kings from Pretenders

2018 has not been a fortuitous year for many start-ups and underdogs.

Whilst data shows an overall increase in investment volume for new ventures, it also shows a significant failure ratio within these same figures. In fact, data published by tracking agency ‘ICORating’ suggests that a majority (55%) of these initial coin offerings have failed within just the second quarter of this current year.

Potential reasons for this include a ‘bubble’ effect resulting from the artificial inflation of token prices which in actuality hold little to no real value, inability to acquire funding or meet expectations, and the difficulty of gaining attention and penetrating a highly competitive space.

Considering the reported failure rate of ICOs at present, it would be reasonable to exercise caution when considering investment in any of the influx of new tokens on the market (no doubt exacerbated by recent decisions made by Coinbase).

A Utilitarian Perspective

This writer reccommends that you apply critical thinking, solicit the advice of experts and knowledgeable friends, do your own research and cross-reference it with those of pundits and your peers, and do not let anybody encourage you to make any premature decisions. This is all simple advice easily taken for granted, but timeless nonetheless.

We host our own series ICO Analysis / review articles at Hacked.com: articles that break down each project into its fundamentals: such as the strength of the team, technical theory and existing products, and other factors. All of these fields can be incorporated into your own research and analyses. Additionally, I myself frequently publish interviews with a wide range of leaders and experts.

If a coin has no real actionable purpose, inexperienced leadership, technical fallacies, poor communication, or any combination of the above plus more – then there is a good chance that said coin holds no real value, beyond they professed by its proponents.

Looking at Trends

We can’t predict the future, however there are some observable indicators and trends which could point towards the next coins to be chosen by top platforms.

After the PR nightmare surrounding Tether of late, there has been something of a rush of new contenders attempting to become the next stable-coin (a fixed-value token used for off-setting bear markets, or to be used as an intermediary. One of the most talked about of these is the Winklevoss twins’ ‘Gemini Token’.

Adjacent to the ‘Gemini Token’ is the unique investment orientated token from BitMart exchange entitled the ‘BMX Token’. Like a stable coin it can be used as an intermediary for exchanges with other forms of cryptocurrency, however it has the added benefits of affording token-holders discount on all on-platform transactions in addition to being able to stake these coins towards potential new coin listings in the future.

I have also frequently borderline evangelised Terra Virtua on this site and beyond.

As a disclaimer I have no holdings or stake in any of the above companies or tokens. Additionally, I possess a small and transient amount of Bitcoin.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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The Basics of ICO Investing: A Brief Reminder to Those Who are New to the Game

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The ICO market has been heating up for a little less than a year now, but it truly has turned into a new wave of technology. The amount of wealth being created is insane, and it can be difficult to keep up with the rate of change that is occurring within the industry. It is like the tech boom of the early 2000’s all over again, and this is your chance to mint a lot of money.

Researching ICOs

If you’re looking to put some money into an ICO, the first step is tracking down the right one for you. There are lots of websites devoted to the different ICOs that are currently underway or planned to be soon, but CoinSchedule is my personal favourite right now. You can find out about new ICOs here, and then the hard part begins.

You need to perform your own due diligence to figure out if the ICO is right for you. You can look through forums and Reddit, but gaining an understanding of the fundamentals of the company (team, product, market size) is the only way to avoid losing all your money in the long-run.

Telegram is a great chat platform for connecting with others, and there are a lot of expert level people who are willing to share tons of information about cryptocurrencies and ICOs, so I would recommend you check out that tool.

The Due Dilligence Process

There are a few key insights you need to apply in your investing process. First, the cryptocurrency community is segmented into different use cases, and there likely to be only one successful project for each use case. So before you do any investing in a certain project, it is time to do an analysis of the competitive landscape. You don’t want to be betting against yourself by putting money in multiple projects in the same sector, so it is likely you’ll want to choose only the project you think is most likely to succeed.

To learn more about the project, most companies have Telegram channels where you can observe the community and get and idea of what the developers are like and where the project is heading. In general, Telegram is an invaluable research tool.

Finally, you’ll want to examine the amount of supply the company is keeping to itself. You want the founders to have “skin in the game” still, but you also don’t want them to have such a high proportion of coins on hand that they can gain a profit and then start to de-risk by selling off their holdings.

Going Through with the Purchase

Assuming you’ve finally selected a coin you would like to purchase, it’s time to execute. Most coins are supported by Ethereum, so you’ll need to purchase some Ether and move it to a wallet that will support a variety of coins. Currently, I use MyEtherWallet.

Purchasing the coin is actually much simpler than you would think. All you need to do is get the public address of the ICO and send them the amount of Ether you want to invest. They will send you your tokens when the ICO closes, and you have successfully participated in your first ICO.

Know Your Client (KYC) rules are for keeping track of your identity and following the security regulations of your jurisdiction. In the beginning, it was rare a company would follow them, but now that regulators are cracking down, you will likely have to provide all your identification information in order to participate.

If you do want to sell your tokens at any point, you can use an exchange like Binance that allows trading of a wide variety of tokens.

Watch for Pump n’ Dumps

As long as there have been equity investments, there have been pump n’ dump schemes. Aptly named “shitcoins”, there are numerous projects that ICO without a product or even a hope of developing them. The lack of regulations is making this possible, and this is exactly why you need to do your due diligence.

An often pointed out criticism of ICOs is that no one on the team has built anything yet. There is the feel of a group of people seeing an opportunity and jumping on it because there is a chance of high profits, rather than them being able to contribute a lot to the space. So as you look out for “shitcoins”, you should be especially aware of projects that talk about the amount of money they’ve raised, rather than what they’ve built.

Understanding the Risk

The first thing that everyone should know about ICOs is that they are still unregulated. Where IPOs receive intense regulatory scrutiny, ICOs are mostly self-regulated at the moment. Considering the fact that most of these companies are coming from people with little or no track record, it is imperative you are careful about where you invest your money.

Yes, it is a  good thing that you can now make large asymmetric bets that used to be regulated out of your reach, but research is always the answer. For example, if you have a token for a company that doesn’t have a use case aside from funding the company, it won’t serve as a good store of value. With the implementation of the lightning network, cross-chain atomic swaps will eliminate the need to hold these tokens, and their value will trend to zero. Understanding future shifts like this is the key to a long-lasting investing career.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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How ICOs Changed the Way Companies Are Built

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With cryptocurrencies now becoming a household name, investors are starting to look into plays they can make that are more off the beaten path. The market for initial coin offerings (ICO) offers just that, albeit with a dash of risk that traditional initial public offerings (IPOs) do not offer. 

Restrictions on Venture Capital

If you want to make money in Silicon Valley, you need two things: connections and capital. Connections are required, because a lot of projects end up oversubscribed anyways, and you need an advantage over many of the other investors. It also helps if you can provide aid to the company additional to just giving them your capital (e.g. advising on product, marketing, or hiring). The unspoken rule is that you do usually have to be located in Silicon Valley to do well as a startup investor.

Large amounts of capital are also required for regulatory and convenience reasons. Venture capital is considered to be very risky, and as such, it is generally restricted to be accessible only to accredited investors, who must have either an income greater than $200,000 per year or a net worth greater than $1,000,000.

Additionally, most companies didn’t have the bandwidth to deal with having hundreds or thousands of smaller investors, because of the meetings, due diligence, and paperwork required. It was much easier to take larger investments from a small group of people, and keep things simple.

Democratizing Venture Capital

For both these reasons, the number of people who have benefited from the gains in massive technology startups have been very few. Now, with ICOs the possibility arises that investors may join in on the gains, thus democratizing the gains and spreading them out throughout the country and world.

The ability to make asymmetric bets (wagers where there is a high possible upside, but limited downside) has been restricted for a long-time. Lottery tickets are the closest example of a purchase you can make that could result in a 10,000x return, but with the downside capped at the size of your investment.

In a world where income inequality and wealth distribution is a constant source of conflict, the spreading out of these returns could prove to be increasingly important for making sure it doesn’t get worse.

Structure of an ICO

As Hacked readers are no doubt aware, an ICO generally occurs when a cryptocurrency startup wants to raise money. They either have something they’ve already built, or they have a white paper that outlines their business plan and how much money is needed to create and scale the project.

The ICO is carried out by exchanging fiat currency or other cryptocurrency for the “token” in question. A token is considered equal to equity in the company in this analogy, although most firms contend that the tokens are not securities for regulatory reasons (see: Howie test).

ICOs are popular for both investors and traders, as there is an expectation in an increase of market price after the ICO, as well as high volatility (which traders love). Looking at a website like Coin Schedule, you can see the amount of hype that is floating around ICOs at the moment.

Recent Trends in Fundraising

As ICOs become more popular, many companies are going through similar experiences during the fundraising process. Some companies are asking for such high valuations right off the bat that there is little upside for the investors, and a greater chance they will lose money.

If excessive amounts of money are raised before a product has even been built, there is much greater risk in the project. Additionally, there are fewer investors who have made enough money on a project to justify staying invested during a bear market. Compare this to Bitcoin, where some have owned it since its price was in the single digit range, and you can see the difference.

Projects that are heavily inflated upon ICO’ing are losing out on the longer-term opportunity, unfortunately. Some people forget that the most well-known cryptocurrency of all began using an organic mining process rather than an ICO. Although there is almost no money inflow when this is done, it creates a rabid community of supporters who believe in the product, rather than short-term speculators. This solution would not work for all ICOs, but for some, it might be a viable solution.

More than Just an ICO

The ICO is the most well-known part of the process, but often these projects will require money to get them to that point. This is where the Pre-ICO and Pre Sale come from. The Pre-ICO is similar to the “friends and family” money that any business starts off with. It is what is required to get the project off the ground. Then you have the Pre Sale, which is where larger investors who are going to help build the companies product and profile get to buy tokens at a lower price than the ICO price in exchange from their help.

Finally, and it is very necessary to make this clear, all of these projects carry a ton of inherent risk, and a significant amount of research should be undertaken before any investment is made. Where many of the past IPOs had undergone a massive amount of due diligence and had backers who understood the technology, we are seeing many investors hop on the investing train without fully understanding how everything works.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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