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Cryptocurrencies such as Bitcoin are renowned for their price volatility. Indeed, even in the last week (writing in June 2021), the price of Bitcoin dropped to $31,760 – down from its 2021 highpoint of over $63,000 and down 8% on the day, with ether and XRP – other cryptocurrencies – also falling 12%. Whilst it is impossible to predict what will happen with price movements for these investments, there are ways to identify prominent influences on cryptocurrencies which can give an indication of where prices may be going.
Below, our investment team at Bure Valley Group offers a summary of some of the main factors which can impact cryptocurrency prices. We hope you find this content useful.To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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Political and economic events
Sometimes a government decides upon an action which causes a huge sway in cryptocurrency prices. Recently in 2021, for instance, China has cracked down heavily on crypto operators like Huobi Mall and BTC.TOP in provinces such as Sichuan. State authorities appear fearful of their citizens using a currency which sits outside of government control. Decisions taken by Beijiing can have huge effects on the likes of Bitcoin, since up to 70% of the world’s crypto supply is accounted for in China.
It is not just authoritarian governments which crypto investors need to be mindful of. Western powers have also made past moves to regulate digitally-based currencies more tightly. In the US, for instance, debate is raging about whether to introduce stricter “know-your-customer” and anti-money-laundering regulations for crypto exchange and platforms.
Prominent people and institutions
Celebrities can wield considerable influence over the price of a cryptocurrency. Elon Musk, for instance, is renowned in 2021 for endorsing Dogecoin – previously a very obscure crypto option – and, consequently, influenced many investors to buy it. In early June, Musk posted on social media that the “dogecoin standard” is “inevitable”. This – along with other influences such as Coinbase adding Dogecoin support to its platform – was credited by commentators as the main driver behind the cryptocurrency’s 20% rise within the next 24 hours.
How many cryptocurrencies does the world need? At present, there are well over 6,000 – more than the number of fiat currencies in circulation. It is unlikely that this many are needed in real life. As such, when a particular cryptocurrency gains popularity, it is common to see money flow into it from other ones. This can create a “tidal effect” with investors’ capital, and with new crypto options being launched daily it can also lead to dilution. Prudence is needed, therefore, to help guide you towards those with greater chances of success.
The likes of Bitcoin are still largely traded on cryptocurrency exchange platforms like Coinbase, which can be vulnerable to malicious actors and code. In 2018, for example, Binance spotted some strange activities on its platform and suspended withdrawals. It found unauthorised sell orders taking place, and it looked like a 3rd- party app using an API to control Binance accounts was to blame. Within minutes, Bitcoin plunged 10.8%, from $10,740 to $9,690.
So much investment activity on the stock market – buy and sell orders – is driven by institutions and individuals “guessing” what will happen to certain stock prices. When enough people are influenced by these speculations, it can create a “herd mentality effect” where more and more investors want to follow the crowd out of fear of missing out. A similar dynamic occurs within the crypto markets, leading to a rapid rise – or deflation – in asset prices depending on what people are saying. Reddit is a case in point. The platform’s most prominent forum on cryptocurrency – the r/Cryptocurrency forum – has been very influential in recent years over the price of Bitcoin, Ethereum and others – sometimes attracting 36,000 daily comments.
Cost of extraction (mining)
Cryptocurrencies are typically “mined” by vast computer networks which verify the transactions. As more and more people use a cryptocurrency and increasing transaction volumes take place, this increases demand for greater computing capacity. This drives up costs for miners (who are “rewarded” in cryptocurrency) who need to then invest in expensive, more powerful hardware to perform tasks at the required level and pace. If input costs become unviable for miners, this can lead to a price drop as they move to other, more profitable cryptocurrencies. Another factor that impacts mining scalability is the supply of crypto mining hardware. GPUs and ASIC devices, for instance, can sometimes be scarce due to very high demand from miners (e.g. following a spike in Bitcoin or Ethereum prices, where more miners want to rush for profits).
Cryptocurrencies are volatile and hard to predict, but can offer amazing returns with some wise decision making – and a bit of luck!
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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