The crypto market – what to bear in mind when dealing on the newest and less regulated financial market
The year 2022 began with the crash of cryptocurrencies. Bitcoin, the cryptocurrency of the world index, reached its historic high of $ 69,000 in November 2021 and crashed to $ 33,000 in just two months in late January 2022.
As of the end of May, Bitcoin is again below $ 30,000. Indicators show that concern among holders of Bitcoins and other altcoins has reached its highest level in two years.
Cloudname offers both Web3 and Traditional domains, transacted in Crypto and in Fiat currency. Traditional and Fiat domain names and currencies have a consistency and legacy regulation that may seem outdated compared to the new domains and new currencies. In these volatile times, as expectations are reset in crypto markets, that old consistency is valuable.
Although the appeal of the outsize returns potentially, available in Web3 and crypto, are exciting, they come with the respective risks of new markets. Let’s explore some of these issues.
Volatilities in financial markets are commonplace, and in the crypto market, due to high volatility, it can take on more severe aspects. In recent weeks, the crypto market has crashed sharply. But what causes the crypto market to crash?
This article addresses the reasons for the crash in the crypto market. Also, by stating the factors affecting the volatility of the crypto market, we will introduce the essential traders’ strategies.
Why did the crypto market crash?
1. Natural volatilities of financial markets
Price volatilities in financial markets are an inherent feature. Bitcoin has 4-year intervals, and every 210,000 blocks are built over 4 years, after which the hawing occurs, and the rewards are halved. During these four years, the Bitcoin reaction is usually such that it has an almost constant or declining trend during the first year.
The trend grows a year and a half to two years later, and then the so-called Cryptobiosis occurs, the market is reforming. Therefore, after the significant growth of Bitcoin, it needed to be corrected. Thus some part of the recent crash is interpreted in this format.
2. Elon Musk’s actions
Elon Musk has taken different positions on Bitcoin. First, he put Bitcoin on his Twitter bio account and announced that he would accept Bitcoin to sell his company’s products. In a shocking decision, Musk stopped accepting Bitcoin for environmental reasons. A decision that pushed the price of each Bitcoin below $ 50,000 and reddened the crypto market.
3. New FATF guidelines
The Financial Action Task Force (FATF) is an international body whose primary task is to advise effective strategies to combat money laundering, terrorist financing, and financial crime. The agency recently issued a new guideline to provide solutions to combat the misuse of cryptocurrencies in financial crimes. The FATF also emphasizes the authentication of users by businesses operating in the field and the monitoring of transactions.
- The problem – Implementing these guidelines for cryptocurrency platforms is not simply a matter for traditional financial institutions. The decentralized network structure of some cryptocurrencies and unreliable methods in providing services have made it challenging to implement this guideline.
- Implementation challenges – Implementing this restriction is challenging for countries that do not comply with FATF regulations. The challenge is because of given the current infrastructure and how FATF is servicing operating platforms in this area. Because many cryptocurrency platforms provide decentralized and non-secure services, the FATF recommendation for customer authentication and transaction monitoring has confused operators.
- Comply with the new FATF guidelines – Experts say it is not possible to comply with the new FATF guidelines for a significant portion of businesses operating in the field, as exchanges and other decentralized and insecure platforms (such as traditional banks and financial institutions) would have to force authentication on their customers and share information with their customers. Give their users to other institutions; thus, they can no longer be considered decentralized as in the past.
4. Federal Reserve decisions
The Federal Reserve‘s measures to control inflation, including raising interest rates at the end of each season, reducing the supply of dollars, and reducing the balance sheet by $ 8.3 trillion affect the markets and these contractionary conditions. However, some of these measures are the accumulation of dollar liquidity from the market that weakened financial markets, including the NASDAQ index and crypto market.
The Crypto market crashed after the Federal Open Market Committee (FOMC) report reaffirmed plans to control the bank’s balance sheet. The stock and crypto markets plummeted after the FOMC report (in December), which stated that the legislature had committed to lowering its balance sheet and raising interest rates by 2022.
With the correction of the stock market, the price of Bitcoin also decreased, and the market witnessed the liquidation of trading positions, which is less than an hour, $ 222 million in cash trading positions.
5. The government’s policies
The decisions of powerful governments, including the United States and China, are other reasons for the crypto market crash.
- – The US Treasury Department has taken a tough line on buying and selling cryptocurrencies. According to the announcement, all cryptocurrency transactions worth $ 10,000 or more must be reported to the Internal Revenue Service. The US Treasury Department, referring to the problem of tracking transactions and using them in illegal activities. Also, this department said that they are going to plan some legal transactions to prevent cryptocurrencies from tax evasion.
- – Also, the Chinese government formally suspended cryptocurrency trading in September 2017, barring financial institutions and payment companies from providing cryptocurrency trading services and warning investors about cryptocurrency trading. The Chinese government also banned the mining of Bitcoins and other cryptocurrencies in 2021.
- – The Central Bank of Russia and the Government of India have also announced a ban on cryptocurrencies mining. Thus, there is an anti-cryptocurrency among the powerful countries, and most of them seek to create a national cryptocurrency that they can exchange centrally like traditional currencies.
Why are the prices of cryptocurrencies constantly volatilizing?
Volatility is one of the main elements of cryptocurrencies. Many people enter the world of cryptocurrencies because of these sharp price volatilities, making them an excellent profit or causing a loss.
No matter how good your business is, nothing can protect you from cryptocurrency volatilities. Currently, Bitcoin volatilities are 64% per annum, a standard measure of daily price changes. For comparison only, the benchmark is 17% for the S&P 500 and 54% for the WTI.
When it comes to an understanding the current volatility in the crypto market, several factors at play add to the downside. For example, Friday, January 21, was the last day of trading expiration, which often leads to significant volatilities in the market.
Also, due to the volume of open futures contracts at the time, there was considerable price volatility in the market, with Bitcoin (BTC) initially experiencing selling pressure from Thursday to Friday evening.
The thing to know about the crypto market is that centralized banks and institutions do not set the prices of cryptocurrencies; because their nature is completely different from traditional currencies or Fiat. In the following, we will deal with the factors influencing the price volatilities of the currency code:
1. The law of supply and demand
Supply and demand have been the main reason for the increase in the price of cryptocurrencies. Demand depends on various factors, including political and economic events, country laws, and the spread of diseases such as Covid-19. However, no central authority can change the financial regulations of cryptocurrencies.
However, these factors affect crypto price volatilities, but they cannot affect how they work.
The supply of a cryptocurrency is essential; because the price is inversely proportional to the supply. If supply is too high, the price goes down, and if supply is low, the price goes up.
If the supply of a coin is limited and its demand is high, the price will inevitably increase as the cryptocurrency becomes scarce. So when you want to invest in crypto, be sure to consider the supply.
2. Social media
Social media is one of the most critical sources influencing the price of cryptocurrencies. The more the media deals with cryptocurrencies, the more people are attracted to the field. Positive news increases users’ entry into the market and, consequently, increases the price of cryptocurrencies.
However, negative news causes people to leave the market or sell them, which has a negative effect on the price.
Several determinants can help identify the factors influencing the crypto market crash, volatilities, or price changes, and experts dividend them into four main factors.
3. Updates of protocols and events
Updates and events are factors that can increase or decrease the price of cryptocurrencies and market volatility. If positive updates and changes are made to a cryptocurrency, and its features such as performance and support in different markets become better and more, more investors will buy it, and as a result, its price will increase.
If future updates do not help the widespread acceptance of tokens however, investors will be forced to sell their assets in various exchanges, and as a result, their prices will crash sharply.
4. Laws of states
Whenever a government issues official statements about cryptocurrencies, it usually affects the price of Bitcoin. Even if that government action does not directly affect cryptocurrencies, it will still affect the price of Bitcoin due to the nature of financial markets.
Whenever there is a restriction on the use of crypto, its price changes due to the nature of cryptocurrency transactions, many governments have specific rules to eliminate the anonymity of transactions.
5. Market manipulation
Market manipulation is one of the factors influencing the price of the crypto market. Sometimes people who have large amounts of Bitcoin or a group of people suddenly increase the price, place purchase orders (pump), and after attracting the attention of other investors and entering the game, the amounts purchased in the price higher sold to other greedy people (dump).
Why hold on to the decision to leave or stay in the crypto market?
With the price of Bitcoin down 50 percent since its November high, investor sentiment was increasingly hostile, and the focus of ATH forecasts shifted to discussing its potential for return.
The current cryptocurrency slump has the same broader context as the stock market slump, as technology stocks recently crashed to a 14-week low. But while the majority agrees that rising interest rates and political tensions have exacerbated investor uncertainty, should investing in the crypto market hold on or wait?
No market is predictable. But many financial and economic experts have given a prominent picture of the future of the crypto market, believing that the industry, with all its success in recent years, is only in its infancy and is constantly evolving.
The main element of cryptocurrencies is their price volatilities. Many people choose this industry to invest or maintain the value of their money, and many people make excellent profits from cryptocurrencies. But if you do not know enough about analyzing the currency code, these volatilities may be to your detriment. Here we are providing some solutions:
- Fundamental analysis – you can use fundamental analysis to research cryptocurrencies and, if appropriate, invest in them and make a good profit.
- Regulatory advancement – Some marketers believe that because of their high capacity and potential, cryptocurrencies can even replace money in day-to-day transactions. However, some news and analysis about the future of cryptocurrencies suggest that trade may become more legal in the coming years. Also, there would be more and more talk of possible rules and regulations that developed countries are considering to control this exciting market. These regulations can be beneficial, bring about a safer business, significantly limit this vast market, and cause the cryptocurrency to crash.
- No guarantee – The factors influencing the price of crypto are very diverse and comprehensive. Some act slowly, and the traders will see their effect later, but others have a sudden impact. Fact is that one can’t guarantee that cryptocurrencies will go up or will crash because this is a wholly new market that is neither well defined nor well regulated.
Many experts also believe that the recent collapse for various reasons cannot be considered similar to the crashes in 2019 and 2021, and we must wait and see the future of market chau
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