Price Determinants

Price is determined by the supply and demand relationship of the underlying asset and capital. Two key factors that influence the inflow of capital into the underlying asset are:

Supply of market capital:

Whether there is more “capital” available for speculation depends on whether there is a phenomenon of “a rising tide lifts all boats.”

The supply of capital comes from the monetary policymakers of various countries, who mainly manipulate it through the speed of capital injection and central bank benchmark interest rates. Therefore, in a sense, price is a monetary phenomenon, especially influenced by the monetary policy of the Federal Reserve.

Market psychology or “expectations”:

When the market expects the price of the underlying asset to rise, holders will be reluctant to sell (unwilling to sell at a low price), which will temporarily reduce the supply of chips (actively locking in positions). At the same time, investors will actively raise funds to enter the market, even if the Federal Reserve maintains its monetary policy or raises interest rates.

The interaction of these two factors forms the price trend. Once a trend is established, it needs to complete its predetermined path before it can turn, as changes in the collective psychology of market participants take time; this can be referenced in the book “The Crowd.”

Therefore, there is a famous saying in the investment community:

“Prices will only move in the direction of least resistance until momentum is reduced to zero.”

This is exactly what André Kostolany said:

“Medium-term trend = Capital + Psychology”

Note:

I am dissatisfied with those in the cryptocurrency circle who excessively rely on historical charts for analysis, the “boating sword seekers,” and the “chartists.” Indeed, past charts can influence the psychology of some investors, thereby affecting capital flow, but this is only a minor influence. What truly determines price trends are large capital supply and **market expectations (psychology)** changes, not simple chart structures.

As the ancients said, decision-making and taking action should focus on the “big picture” while attending to the “small details.” I deeply agree. Overemphasis on details may lead one into the trap of self-righteousness.