Understanding how market forces and external factors affect cryptocurrency prices is key to making cryptocurrency price predictions as accurate as possible. These factors can be crypto-native or macroeconomic in nature.
1. Tokenomics
Tokenomics is derived from the words “token” and “economics.” It is the study of the supply and demand of a cryptocurrency and their effects on cryptocurrency valuations.
Each cryptocurrency project designs its tokenomics to best suit its value proposition. For example, Bitcoin (BTC) has a capped supply and decreasing inflation rate, attracting demand from those who seek an inflation hedge and a store-of-value asset.
Meanwhile, Etherium’s (ETH) utility for gas fee payment, staking, loan collaterals, and other decentralized finance (DeFi) use cases support demand for the token.
Cryptocurrencies with superior tokenomics, like BTC and ETH, attract capital resulting in their price increase. Tokenomics is key in crypto fundamental analysis.
2. Value Proposition
By definition, value proposition refers to the benefits that a company, product, or service delivers to its customers.
In the case of Bitcoin, its value proposition lies in its inflation hedge property, the high level of decentralization and security it offers to its users, and its peer-to-peer payment network.
Meanwhile, Ethereum’s value proposition lies in it being the most popular smart contract in the world and home to the hottest decentralized applications (dApps).
Meanwhile, L1 blockchains like Solana’s (SOL) value proposition lie in solving problems plaguing bigger rival Ethereum, such as high gas fees and low throughput.
Elsewhere, niche platforms like decentralized GPU computing marketplace Render (RNDR), decentralized exchange Uniswap (UNI), and data availability layer Celestia (TIA) focus on offering specialized products and services.
3. Token Vesting and Unlock Timelines
Cryptocurrency investors have to be aware of token vesting and unlock timelines. When a crypto project is formed, the development team, early investors, and founders typically get a significant share of the newly minted tokens as payment for their contributions.
Tokens allocated to project insiders are placed in a vesting smart contract that is automated to gradually release vested tokens at certain time intervals. Tokens are vested to limit their circulating supply, decrease selling pressure, and give it support to increase in value.
When vested tokens are unlocked, it releases a significant amount of tokens to its circulating supply. If project development team members, early investors, and founders sell their tokens in the open market, it can cause the price of the crypto to drop.
4. Market Sentiment
Market sentiment refers to the mood of investors as a whole. Financial markets are driven by human emotions of fear and greed. Oftentimes, these human emotions lead investors to make irrational decisions, resulting in explosive price rises and sudden market crashes.
In a bullish market, you will see cryptocurrency prices rise without a market catalyst. On the other hand, bearish markets often result in low investor interest and stagnant crypto prices.
Experienced investors tend to gain an intuition to read these market emotions, giving them the confidence to go against the herd and allowing them to profit from irrational investor behavior.
5. Market Listings
Crypto tokens have shown a tendency to surge in price before listing on popular centralized exchanges such as Binance and Coinbase.
Centralized exchanges have the power to bring in a flood of new investors and capital to unlisted cryptocurrencies. These platforms come with easy-to-use features that allow non-crypto-native users to buy crypto using their debit/credit cards and other traditional finance methods.
Token delistings tend to have negative effects on token prices. A crypto token can be delisted due to regulatory concerns and security flaws.
6. Endorsements
Celebrity endorsements and associations with famous personalities and brands tend to spotlight crypto tokens, leading to increased investor interest and price surges.
Dogecoin (DOGE) and Elon Musk are the best examples of how powerful celebrity endorsement can be in the crypto world. In the crypto bull market of 2021, Musk played a pivotal role in spotlighting DOGE.
At the time of writing, DOGE was one of the most valuable cryptocurrencies in the world, boasting a multi-billion dollar market cap.
Similarly, brand associations help crypto projects gain credibility. In 2022, we saw Polygon (MATIC) emerge as a top-performing crypto after the blockchain network partnered with global brands, including Meta, Disney, and Adobe, among others.
7. Macroeconomic Forces
Cryptocurrency markets are no longer isolated from macroeconomic forces. Over the last decade, cryptocurrencies have grown to become a multi-trillion-dollar industry. The crypto market is no longer exclusive to tech enthusiasts, cyberpunks, dark web users, and individual traders.
As more financial institutions, global corporations, hedge funds and other institutional investors invest their money into digital tokens, the crypto market becomes more sensitive to macroeconomic forces such as inflation and interest rate changes.
In 2022, Bitcoin and altcoins saw their valuations fall to multi-year lows as risk asset markets crashed after US and European central banks began raising interest rates from near-zero rates in a bid to quell raging inflation.
The inception of the spot bitcoin ETF in January 2024 and the subsequent inflow of institutional capital will make crypto markets more sensitive to macroeconomic forces than ever.
8. Future Outlook
Financial markets are forward-looking. Investors put their capital in assets with the expectation of handsome returns in the foreseeable future. Therefore, promising projects that have the potential to disrupt industries or change more lives attract extra capital and trade at a higher premium than the rest.
For example, Ethereum, a blockchain platform that has the potential to disrupt the traditional finance industry, demands a price premium compared to NFT-focused blockchain Flow.
The popular market narrative at any given moment also plays an influential role in the market perception of a crypto project’s outlook.
For example, the hype surrounding artificial intelligence (AI) in 2023 helped AI-related crypto projects post outsized gains for their perceived positive outlook.
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