1. Supply and demand: Basic economic principles
The most fundamental driving factor of market price fluctuations is the relationship between supply and demand. Simply put, when the demand for a certain asset increases and supply cannot keep up quickly, the price will rise; conversely, when demand decreases or supply increases, the price will fall. For example, in the cryptocurrency market, the price fluctuations of Bitcoin are often closely related to changes in market demand for it. When market enthusiasm is high and funds pour in, the price of Bitcoin will rise rapidly.
2. Market sentiment: The driving force of human behavior
Market sentiment is an important factor determining short-term price fluctuations. Sentiment is driven by investors' psychological reactions, such as fear, greed, and optimism. Market sentiment can be reflected through data such as trading volume, buy/sell order ratios, and social media sentiment. For instance, during a bear market, low investor sentiment may lead to a wave of selling, while in a bull market, investors' greed can drive prices up dramatically.
3. Macroeconomic factors: Policy and environmental changes
Changes in the macroeconomy are often an important factor influencing market fluctuations. Macroeconomic data such as interest rate changes, monetary policy, and economic growth directly affect the flow of funds in the market. When central banks raise interest rates, the cost of funds increases, which may lead to market corrections; whereas when the government implements stimulus policies, the market may experience a wave of increases. For example, the economic slowdown caused by the global pandemic in 2020 led central banks to cut interest rates significantly and inject liquidity, resulting in a rapid rise in asset prices.
4. Market liquidity: Capital inflows and outflows
The liquidity of the market determines whether the buying and selling of assets is smooth. When liquidity is insufficient, large transactions can have a significant impact on prices, leading to sharp fluctuations. Conversely, in a market with strong liquidity, even large-scale transactions result in smaller price fluctuations. The cryptocurrency market tends to have lower liquidity compared to traditional markets, thus large inflows and outflows of capital often lead to significant price volatility.
5. Technical analysis: The power behind trends and charts
Technical analysis predicts future market trends through historical data, chart patterns, and technical indicators. Although technical analysis cannot fully predict market fluctuations, it assists investors in identifying trends and key points through the study of market history, allowing them to prepare in advance. For example, breakouts of support and resistance levels are often accompanied by sharp market fluctuations.
6. External events: Sudden news and risk events
Finally, the impact of sudden news and risk events on market fluctuations cannot be ignored. Sudden events such as natural disasters, political events, corporate scandals, and wars can all trigger significant market volatility.