By C.H. Cunningham
Cryptocurrency has the ability to revolutionize world finance, as it is now designated as an essential asset class. And in a complete reversal of past policy, has led Goldman Sachs, one of the world’s leading investment banks, to consider Bitcoin an investible asset. However, the cryptocurrency market is extremely volatile and remains a fairly high-risk play. Although ups and downs are expected in emerging markets, any adverse effect on investors and market players is of great concern when such risk is attached to investment capital.
That said, big risk often yields big reward, and the right investment can result in a huge payoff. This has absolutely been the case with Bitcoin, who in just over a decade, regardless of multiple rallies and crashes, has gone from $.00008 per token to, at times, over $60,000. The same goes for Ethereum which has risen in value from $0.4209 to an all-time high last month of $4,362 within five years.
However, the Bitcoin market has not always sustained its uptrends. For example, after a three-month rally in 2011, the price of a Bitcoin token dropped from $35 to $2. Fast forward to present day and we have seen this market have its share of ups and downs. In the first half of 2021 alone, the price of Bitcoin has gone from $32,000 to $60,000 and back again. It goes without saying that this lack of stability results in massive depreciation in the value of investment portfolios of traders who took the risk. Yet over the long hall, if you invested in Bitcoin in the beginning, and endured the massive swings, you’re up 43 billion %.
On a lesser scale, the same thing is happening to other popular cryptocurrencies, like Ethereum, Binance (BNB), and Dogecoin. As demonstrated in last month’s market crash, the price of Ethereum fluctuated between $1731 and $4308, BNB tumbled from a record high of $691 per token to $211, and Dogecoin danced between $.21 and $.73.
As an emerging market, there are several factors that influence and effect the price pendulum.
- News Manipulation. As a new space with lots of potentials and possible gains, there are silent (and mostly anonymous) manipulators who engage in pump and dumps impacting the health of the market. Market signals, or indicators, are distributed from groups like Telegram, Discord, Slack, etc., based on analysis of the market or economic conditions. Following suit, the news media reports on these signals, sending alerts to investors influencing the action of buying or selling. However, before the signals are even given out, the administrators of the group have already set sell positions in the market. After they pump out signals, they sell the tokens and dump the price of the crypto asset.
- FUD – Fear, Uncertainty and Doubt. Popular figures, such as top CEOs and other corporate executives can have a significant impact by simply expressing their opinions. Their disposition sends a strong message and has the ability to sow seeds of uncertainty. Movements in the cryptocurrency market are based on acceptance from individuals and/or companies. Elon Musk has greatly influenced the cryptocurrency ecosystem with his tweets. With a following of 56 million on Twitter alone, his tweets about cryptocurrency can send the market into a frenzy. In February 2021, Tesla announced that the company bought Bitcoin and would start accepting Bitcoin for the sale of Tesla cars. And Bitcoin investors rallied causing a surge in the price from $43,000 to an all-time high of $64,000. Then in early May 12, Tesla made a U-turn on their decision as Mr. Musk tweeted that the company wasn’t going to be accepting Bitcoin anymore. Bitcoin investors rallied again, selling this time, sending the price into a tailspin bottoming out around $30,000. He had the same influence with Dogecoin. As of January 24, 2021, the price of Dogecoin was $0.008721, and then Elon Musk started promoting the cryptocurrency. Within a few months, the price of Dogecoin increased to an all-time high of $0.73. After his appearance on Saturday Night Live, where an off-the-cuff joke was delivered by his mother, the price of Dogecoin tanked.
- Government Ban. A government ban has the ability to swing the cryptocurrency market. Governments, for the moment, don’t seem to have a hefty appetite for currency they cannot control. Cryptocurrency is banned from at least a dozen countries thus far and is not expected to gain significant traction in this arena anytime soon.
With 10,000+ currencies in the current cryptocurrency ecosystem, some have proven to be much more successful than others. There are some that have staying power, some experience a temporary run, and others flailing along the way. Performance is dependent on a multitude of factors and can have differing results.
- Unique Use Case and Positioning. In innovation, uniqueness is key to success. Bitcoin was created and introduced in 2009 as the first decentralized cryptocurrency. It was positioned to replace the dollar as a currency based on its unique technology. Showing gradual growth, Bitcoin today holds its position as the most successful cryptocurrency created. Ethereum, created in 2015, operates a proof of stake blockchain allowing others to own stakes in the project. Additionally, it allowed other projects to make use of its blockchain for transactions enabling investors to execute smart contracts on its blockchain. This base distinguished Ethereum from Bitcoin. Both have unique characteristics, and both have seen success.
- Recognition. Most times, people follow people and not just projects. Introducing and running a cryptocurrency project is no small feat. And combining a smart team with the right influencers can contribute to its prosperity and growth. An example is Dogecoin. Initially started as a joke on the popular social platform reddit, its inventors were, ultimately, trying to replicate the success of Bitcoin with their own offering. Combining the meme for Doge with the recognizable term Coin, they created and actual coin that included a dog face. Coupled with a little luck, the savvy Elon Musk and influencer Snoop Dogg took notice of their unique design, mentioned it on social, and the rest is history.
- Roadmap. Presumably, every successful cryptocurrency project has a strategic and solid roadmap to guide their growth. The proper execution of the plan will often result in raising more money, building a loyal community and actualize real growth. A benefactor from a strong roadmap is the cryptocurrency exchange Binance. Founded in 2017, the exchange was launched with the ability to handle up to 1.4 million orders per second, minimal trading fees and added the independence from fiat currencies making it more difficult to be used for money laundering. In its first three months, accompanied by the introduction of Binance Coin as an asset, investments jumped from $15 million to $500 million helping them to become the third biggest cryptocurrency in the market. Since finding initial success Binance has experienced a series of setbacks, but still holds its own dominating the global exchange.
- Exchange Listing. Another factor that influences the growth of cryptocurrency projects being listed on exchanges. Similar to its stocks counterparts, exchanges have a large user base of traders who trade cryptocurrency assets. Therefore, when a cryptocurrency is listed across multiple exchanges, it expands its reach and usually increases usage.
Momentum has been building for the acceptance of cryptocurrency as a form of payment from many retailers. In 2014, both Overstock and Microsoft announced their decision to accept payment in Bitcoin for domestic orders. Following the trend, The Home Depot, Whole Foods, and Starbucks have been added to the list of those accepting cryptocurrency for payment. In October 2020, PayPal announced its intention to accept cryptocurrency as a payment option on its platform. These decisions have helped these companies and services reach out to a growing user base of cryptocurrency enthusiasts, subsequently increasing the revenue stream of the business.
With a market capitalization of $1.7 trillion, the cryptocurrency ecosystem is growing and will continue its upward trajectory as stores and payment platforms are modified to accept cryptocurrency as a form of payment. Many athletes have already been converting their salaries to assets in their crypto wallets. In December 2020, Carolina Panthers football player Russell Okung announced that his team has agreed to pay his contract salary in Bitcoin, which could effectively result in him being the highest paid player in the NFL. If the price of Bitcoin continues its overall upward climb, this could start a trend for countless others.
In an ecosystem filled with a lot of projects both solid and scams alike, it is imperative to exercise some caution before making investment decisions. As mentioned above, there are several factors that make a cryptocurrency project successful. These same factors need to be considered before investing in a project. Study the use case and the importance of the project, as it will help determine the growth trajectory of the project in the long run. Lookup information on the team behind the project and study the whitepaper. Confirm if the project is listed on credible exchanges. Usually, exchanges carry out due diligence before listing a currency on their platforms. Doing solid research most always helps to make healthy decisions with investments. Most important, be aware of the risk.
Ever since the invention of Bitcoin in 2009, the cryptocurrency market has encountered several challenges impacting its growth, both positively and negatively. There are many speculations and price predictions for Bitcoin as well all other cryptocurrencies. While there is no guarantee that these price predictions will come to pass, it’s quite clear the world is embracing this new technology and incorporating it into daily investment activities and industrial operations.