Although through the eye of a layman, the changes in the price of a cryptocurrency seem totally random, the surges and plunges follow no particular pattern and the stability cannot be guaranteed yet there are simple ways which could be used for an investor or a layman to roughly foresee where a particular currency is heading (If no unusual events occur). To technically show the factors which affect the price of a cryptocurrency, economists from Yale University have made a detailed report that points out the factors on which the price of the cryptocurrency depends.
One of the main factors which are used to predict a currency’s direction is its momentum and the method is indeed effective if there are no unusual occurrences in the market. For example, if a currency has plunged for a while, it is highly likely that it would continue to plunge following its momentum.
The most recent example is that of BTC, the currency plunged from its support value and as a result, it kept plunging. Although there were other variables involved but the most dominant was the factor of momentum. BTC followed its plunging momentum and fell to where it stands today.
Yale University’s report also shows mathematical evidence and proofs of how bitcoin followed its momentum trends over the years.
Investor attention is the second factor which can be used to analyze a cryptocurrency’s direction in the near future. Based on the positivity or negativity of the attention factor, it can be predicted whether the currency would plunge or surge. Investor attention could be summed up using a few of the factors below
- Internet searches
- Media attention
Internet searches? Seems pretty unrelated to a cryptocurrency right? Wrong. Bitcoin hit its all-time high in December 2017, and the unusual surge was closely tied to the internet searches made using the name Bitcoin.
The above graphs show how internet attention also resulted in the price boost.
Media attention is a wide subject for a cryptocurrency. In the domain of Altcoins, if a currency partners up with a company, declares new use cases, opens new schemes or in general has some important news, the price goes up. Similarly, if there’s negative news regarding the specific currency, for example, if the news of hacking, security breach, code flaw, or a fraudulent activity relating to a currency comes up, the price can go down.
Exchange listings are important occurrences for new startups. The best time the ICOs and fundings payback are the times when the currency is listed on a popular exchange. For example, a few months back, Coinbase opened the opportunity for coins to get listed on their exchange. This opportunity helped a lot of currencies to boost up their valuations just by getting their name registered on Coinbase.
People are generally interested in startups and tokens which have some utility. Useless tokens are generally termed as shitcoins and are very short lived. Startups that offer more utility for people, offer crypto adoption and alternatives to fiat. These use cases resultantly increase the price of the particular currency. For example, the utility of Ethereum’s smart contracts’ functionality has put ETHs price where it is now.
Supply and demand
The simplest way to judge a currency’s valuation is by supply and demand. This economic factor is used for almost all kinds of commodities. The less the currency would be in supply the more the people would be willing to pay for it. The complexity of PoW puzzles increase and the mining rewards are increased. Similarly, if the supply is not limited, the value of the currency decreases and hence the price is less.