This year was marked by many events that directly or indirectly affect the cryptocurrency market. Bitcoin reacted especially noticeably to them: in 2024, its value remains extremely unstable. Currency volatility has a noticeable impact on the market, so it’s important to know what factors determine changes in value.
In his commentary for the European Association of Software Engineering, Icon.Partners lawyer Vladyslav Udianskyi shared an analysis of the factors that most strongly impact the state of Bitcoin.
What indicators impact the cryptocurrency market?
There are many indicators that determine the course of crypto assets. Among them, the expert distinguishes market sentiment, regulatory initiatives, technical factors, manipulation and fraud, political changes, etc. With so many variables, it is extremely difficult to predict the exchange rate of cryptocurrency, so it is worth considering each of the factors separately.
Market sentiments. Like the price of any commodity, the price of Bitcoin depends on supply and demand ratios, which are impacted by market sentiment as investors react to news and events. The most high-profile case in recent times is the attack on Mt.Gox, which resulted in the loss of approximately 850,000 BTC. This significantly reduced demand due to a lack of confidence in Bitcoin exchanges and also created an oversupply on the market, including the black market, as the hackers gradually sold the stolen Bitcoins. Additionally, the ongoing Mt. Gox repayments to creditors might lead to a reduction in Bitcoin’s price if those creditors decide to sell their holdings once they receive them.
Regulatory initiatives. Government interventions and regulatory updates often cause the rate to fall, as was the case in 2021 due to the Chinese government blocking crypto transactions. As a result, Bitcoin fell by around 10%, while other assets like Ethereum and Dogecoin fell by 22% and 24% respectively.
Macroeconomic factors. Changes in interest rates or inflation have almost the strongest effect on the market. For example, in April 2021, the inflation rate in the US jumped from 1.6% in March to 3%. This rise in inflation coincided with a sharp drop in the price of Bitcoin from $57,637 in April to $37,305 in May 2021.
Technical factors. Events like the Bitcoin halving have an unpredictable effect on value. Halving occurs approximately once every four years and reduces the rate at which new bitcoins are created. In the case of stable demand or its growth, this creates a shortage of supply and an increase in price. However, halving the block reward will increase the cost of production, causing less efficient miners to become unprofitable and shut down. In turn, this can cause transaction confirmation times to increase, transaction fees to potentially increase, and, as a result, the Bitcoin price to drop due to the reduced demand.
Manipulation and fraud. John Griffin, professor of finance at the University of Texas, together with Amin Shams, provided strong evidence of manipulation in the Bitcoin market in 2017. Their research showed that the Tether stablecoin was used to buy Bitcoin at strategically important times, artificially inflating its price. This manipulation created a false impression of demand and significantly contributed to the subsequent emergence of a price bubble.
Political and economic changes in the USA. The American market directly determines the course of the cryptocurrency market for many reasons:
Bitcoin is traded mostly against the dollar, making the cryptocurrency dependent on USD fluctuations.
A significant number of serious crypto investors are US residents.
The US is also home to most of the largest and most influential financial markets, including stock exchanges and futures markets where financial products related to Bitcoin are traded.
Some major crypto projects are affected by US regulatory initiatives. The indirect impact of Bitcoin’s fall has resulted in SEC filings against major exchanges such as Binance, Kraken, Genesis, and more.
The policy of the US Fed is monitored around the world and has a significant impact on financial markets. The Fed’s monetary policy decisions, such as changes in interest rates, impact investor behaviour and liquidity conditions.
The US influences the global cryptocurrency policy, which is formed mainly based on the recommendations of the Financial Action Task Force (FATF), adopted in 2021.
Against the background of political changes in America, it will be difficult to predict the behaviour of the currency, but these changes will have a significant impact on the price of Bitcoin and other crypto assets. US leadership in policymaking is benchmark and critical for investors in making decisions about investing in Bitcoin.
What affects Bitcoin’s lowest price limit?
There are several factors that determine the lower limit of Bitcoin’s value. Halving has a significant impact: a reduction in the supply of new bitcoins can gradually lead to an increase in price. On the other hand, mining costs set a practical minimum because prices falling below these costs make mining unprofitable.
Historical lows also give an idea, Bitcoin often finds support at these levels, recovering after reaching this support line. Market sentiment and investor behaviour play a critical role, as long-term holders and institutional investors tend to buy during major declines, preventing further declines. In addition to the mentioned, technological progress and pace of implementation, as well as regulatory actions, also impact the lowest possible cost.
Analysts at JPMorgan note that the cost of producing bitcoin has historically acted as a floor for bitcoin’s price. The midpoint of the manufacturing cost range as of April was around $26,500. This figure is expected to mechanically double to $53,000 after the halving.
We have already felt the effects of the halving with the price falling to around $55,000-$56,000, but it is quite difficult to say for sure whether the decline is over. This decline is due to a drop in Bitcoin’s hash rate, as less efficient mining rigs will stop operating as they become unprofitable.
According to analysts at JPMorgan, if the decline after the halving is not over, the midpoint of the cost of production estimate range could fall to $42,000, assuming an average electricity cost of $0.05 per kWh.
Do other assets affect the BTC rate?
The impact of falling prices of Ethereum, Solana, and other major tokens on the Bitcoin market is significant but mixed. Similar to traditional commodity markets such as gold and silver, investors often notice patterns that can repeat themselves.
However, Bitcoin generally exhibits greater stability and less vulnerability compared to other cryptocurrencies. This resilience is bolstered by its established position, reinforced by the SEC’s ruling that Bitcoin is not a security, as well as its special characteristics, such as PoW consensus rather than PoS. At most, the decline of other cryptocurrencies can free up investors’ capital to reinvest in a more stable cryptocurrency, bitcoin, which does not raise questions from regulators and is not as vulnerable.
