What factors affect the price of BTC and altcoins?

Today, Bitcoin and altcoins have created a lot of buzz due to their high price volatility. You must have come across various articles regarding the crash of Bitcoin and altcoins. One must wonder how these prices are set if there is no regulatory body. Why then, should prices of altcoin such as Ethereum, which crossed USD 4,000 in May, suddenly fall to USD 2,200? There are many such questions. 

Market sentiments play a major role in price volatility in this domain as well. Such as a single tweet by the Fortune 500 company’s CEO, Elon Musk, stating his interest in Dogecoin raised the price sky high! On the other hand, BTC experienced a different fate when Tesla suspended vehicle purchases using Bitcoin over environmental concerns. In this scenario, people trusted the words of a notable leader and made their choices. The activity of financial giants acts as a catalyst for jumps and falls in the price rates. However, cryptocurrency prices have much more to them than just being driven by a single tweet. 

People’s perception of a specific asset is highly attached to the news relating to it. Newsfeeds can stir panic, fear, as well as euphoria. Recent events related to the news of the crypto ban in China created a sense of fear in the market, and BTC prices collapsed from an all-time high of USD 63,000 to USD 35,000 in less than 15 days. 

These factors are relevant for the short-term forecast. Thus, it is important to follow news and understand that it can also be an attempt to manipulate the market. 

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Market emotions are not the only factor influencing the valuation of cryptocurrencies. It is a result of the combination of many other important factors. 

One major factor is utility. To make a coin valuable, one needs to enhance its utility: how the coin will be useful within the blockchain network it is built on. For example, one needs to buy or have access to Ether to use in the Ethereum Blockchain platform. Other key utilities are, using them as a dividend, mode of exchange, voting rights, etc. 

As the demand for the blockchain network increases, simultaneously, the demand for its native cryptocurrency also increases. This brings us to our next important factor, the demand and supply of the coin. Coins like Bitcoin have a limited supply. When their demand increases in the market, it creates a sense of FOMO. This pushes their values to soar. Some even deploy a burning mechanism that destroys a certain number of coins in circulation. This leads to a scarce supply and rising price. For example, as per EIP 1559 on the Ether platform, the base fee will be burnt to reduce miner collusion and drive the prices up. 

The overall viability and perceived value of cryptocurrency and related projects are major factors driving its value. So how does a project become viable? Projects that continually develop by achieving milestones through partnerships or making user-friendly products become important in the public’s eyes. For example, Ethereum smart contracts help to list ICOs and token sales. They also replace mediators and help save money. These use-cases helped the platform to create positive chatter around the project. 

One of the major factors that helps evaluate a coin and drives its pricing is the fundamental analysis of the coin. We have already discussed some aspects, such as its purpose, utility, and perceived value. Another important aspect before investing in a new altcoin is to go through its whitepaper and understand how efficient is the working of the coin. Is it a legit project with legit documents or just a marketing stunt-filled with technical jargons? What is the roadmap for the project? Who are the founding team members and what is the target market for the project? 

There’s no way to determine the inherent value of a cryptocurrency, as there is no asset backing it. Still, certain calculations can give us a reasonable estimate for the value of cryptocurrencies based on certain assumptions. 

  • Network Value to Transaction Ratio: “NVT” gives an insight into whether a token is undervalued, fairly valued, or overvalued. Compared with the average ratio or peer group, a lower NTV shows that the coin is undervalued and vice versa. 
  • Volume to Market Cap: It indicates the liquidity of a token in the market. A higher value indicates the token is in use and not just stockpiled. 
  • Sharpe Ratio: Sharpe Ratio gauges the returns from a portfolio after factoring in risk. A negative Sharpe ratio indicates that the risk outweighs the potential benefits of an investment and vice versa. 
  • On-chain analysis: It shows how the coin is distributed. If most coins are held by one individual or company, it makes it a risky investment. This indicates that prices will fluctuate significantly if the major holder decides to liquidate or reduce their holding, impacting small token holders. 

To analyze the cryptocurrency market, more global factors should be considered over the long term, such as legal and regulatory framework, Technical and Quantitative Analysis.  
 
Happy Investing! 


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About the Author – TWINKLE MITTAL

Twinkle Mittal is a Financial Analyst at Admantium Crypto Advisors, an Investment banking and consulting firm focused on blockchain technologies. We help early-stage entrepreneurs and startups in Building Business Models and Developing Business Ideas take a 360-degree view of how to build a sustainable business using blockchain technologies, translating concepts into clear cut plans. We also help raise external funding to kickstart or grow your business.

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