The cryptocurrency market is extremely volatile.
Due to that, the price of one coin could fluctuate between 5% up and down.
So, here are four reasons why the crypto market goes up and down.
- Bad/good news for a cryptocurrency
- Whales (institutional investors) join/leave the market
- Retail investors
Let’s analyze these points.
#1 Bad/Good news for a coin
If a big update occurs for a coin where developers worked years to implement new big features, the community usually goes crazy.
Furthermore, the price spikes right after the announcement/release of the update.
However, there is not only good news, right?
Because people tend to like bad news (drama) more, the news is even worse when an exchange gets hacked or when there is a major issue in the code from a cryptocurrency.
Therefore, the price drops usually dramatically after the bad news. People who invest in crypto should always be concerned about this.
Do I hold my coins even when there is bad news about this project, or would I instantly sell the coins with a loss? It’s in my opinion one of the main questions every investor should aks himself.
#2 Dump/pump groups
From time to time, people get invited to the so-called dump and pump groups. However, never join these groups! Here is why.
Dump and pumps are controlled price manipulations where people buy or sell a lot of coins in a short period.
If a coin has a lower market cap/trading volume, chances are high that the price could increase/decrease over 200% when a pump or dump occurs.
Some people organize these dumps and pumps.
Usually, it works as followed.
There is one leader or a leading group that invites a lot of people into a group. They promise the other people that they would make big gains if they buy a certain coin at a specific time. The leaders of these groups usually buy a bunch of a specific coin before they shout out this coin to the group.
After they bought a bunch of coins, they tell the group to buy this coin right now. The price usually follows and increases by 100%+ (depends on the market capitalization).
Furthermore, the leaders sell their coins and usually the people who bought last (the ones who got the announcement in the group) end up with a loss or only a small profit.
#3 How whales (institutional investors) drive the market
Whales are people/investors who have a lot of coins.
These investors can buy/sell a lot of coins and can fluctuate the price of a coin dramatically.
With crypto getting more popular and regulated, more institutional investors join the crypto space.
Always have a look at the rich list before you start investing in a new project.
For instance, if the richest address of a crypto project got ~25% of the total supply, I would be skeptical. This address/investor would control the market.
Let’s take a healthier example. In Bitcoin’s case, the richest address holds around 1% of the total supply. It is still a lot, but it has less power than the previous example (Rich list of Bitcoin: bitinfocharts.com/top-100-richest-bitcoin-addresses).
I should point out that the richest addresses are usually exchange addresses. Because big exchanges accumulate fees from every trade, they have a lot of coins. Furthermore, there are some people who hold all their coins on exchange wallets.
Therefore, big exchanges are automatically whales. In addition to that, exchanges don’t have a really big interest in dumping a coin.
Because if they “destroy” a coin, they get fewer fees and therefore less revenue. In the long term, they would harm themself. However, if an exchange decides to delist a coin, it will probably dump all coins on the market. So, be aware of that if you see that an exchange hold ~5%+ of a coin and decides to delist it.
#4 Retail investors – Why they buy altcoins
Retail investors are the ones who mostly drive the altcoin market. They are the ones who are looking for the Bitcoin 2.0 or an alternative, which could bring 10x+ profit.
I should also mention that investing in a small market cap coin is riskier than investing in Bitcoin or the top 5 coins.
Because these big players like Bitcoin or Ethereum established themselves and have a big community. Small coins however have a smaller community, but they could have a strong USP (unique selling point). That means, that they have features that other cryptocurrencies don’t have and therefore, they are more unique, provide more value or another use case.
Most of the time, these good projects climb up the crypto ranking fast and gain popularity fast.
But why are institutional investors not buying altcoins or buy fewer altcoins?
Because they have a lot more to lose. Investing in Bitcoin is risky enough and I think that they don’t want to get penalized by regulators. The market still needs more regulation or we will not see more “smart money” coming into the crypto space.
If you want to know more about the volatility of Bitcoin and crypto, feel free to read this blog post: Why is Bitcoin so volatile?