Before throwing our coins out of the pot or making second guesses about a big crash one must understand how the price of altcoins work.
The price of some altcoins on the trading market, has a lot less to do with its intrinsic value. It is actually what individuals, and most traders (who seek profit only), believe it to be worth.
So, what is the reason behind the recent downward price spiral? Not much of conspiracy to “ruin the cryptocurrency” other than an expected price correction coupled with some external factors.
Punters including ‘corner shop’ setups inflated the price with rampant price speculation. Speculation based on nothing more than historic (and a short history) rise of the price of the coin from only a few cents to almost $20 000 each.
The idea of creating an invention that performs a certain function quite soundly and then limiting its supply displays the financial clout of its creator/s.
That way, the natural laws of supply and demand would drive up the price of Bitcoin, as it became rarer though needed. It is already becoming harder to attain (through mining) and as it encroaches its supposed 21-million-unit limit.
“The fact that people keep talking today that bitcoin is below 10,000, it’s a disaster, or bitcoin is above 10,000 and that’s crazy. I think the fact that bitcoin is still alive, and attracting so much attention, is the fact that we’re talking about bitcoin in Davos with a Nobel Prize winner, a central bank governor and a seasoned investor. I think that’s a powerful tool.” – Jennifer Zhu Scott (Radian Partners principal).
External influencers of price
But there are external factors that come into play that affected its speculative price. Factors such as the rise of other altcoins after the split in its technology.
Bear in mind that the blockchain code is open to anyone smart enough to develop and run a product on it.
So, there is also some kind of a substitution effect as newer altcoins become more specific in purpose and faster in executing transactions.
This results in people switching from Bitcoin to the likes of Ethereum-run newcomers like DigixDAO.
These new coins are doing well (if rising price is an indicator) and climbing while others lose both intrinsic a speculative value.
External factors including market sentiments do in fact play a huge role in determining the demand for the product or service. In the case of Bitcoin, the closing down of some Exchanges in Asia as well as talks of heavier regulation. Such was mentioned at the World Economic Forum in Davos 2018.
Global leaders pledging to take tougher measures to regulate cryptocurrencies raises cause for concern for people who have a significant amount invested in it.
So, the usage by criminals for instance, has created a much-expected reluctance by governments and financial institutions to accept its legitimacy.
There is also a constant and sometimes subliminal shift in thinking, as trading involves a lot of psychological and emotional play on buying behaviour.
One such example is the impulse people have when purchasing items that are supposedly on ‘special’ or at a low price.
A 75% discount on a pair of shoes only tells you that the seller has marked it up so high that they could still make a profit when they knock it down by that much!
You only notices the price (before and after) the discount. This is without realising that it cost the buyer a fraction of both to produce, package it and get it shipped to the store.
The true value of ‘the shoe’ lies in the materials (quality) used to produce it for it to last long or give it its level of comfort (its true purpose). That and its appearance of course.
The “brand name and image” in this case can thus be comparable to the speculative aspect of a commodity.
So, a pair of pumps would sell (at a higher than normal price) if the likes of Beyoncé or Gal Gadot are seen wearing them.
The same goes for sportspeople and the whole multi-million dollar/euro endorsement deals they carry. Their endorsement of a product thus ‘legitimizes’ it.
When global leaders, banks, and financial institutions raise concerns about cryptocurrency – it does the very opposite. This sets off market panic and the selling off we are currently observing.
The future of Crypto
So, what will happen from here on? Provided it is not outright outlawed – which is proving to be difficult as even the South Korean government have now softened their tough stance on the Crypto Exchanges.
This is after they discovered what a tax ‘gold mine’ Crypto exchanges can be. This is then when the speculative buying will begin again.
Investors who couldn’t purchase Bitcoins at levels above $10 000 will now be seeking an opportunity to enter the market.
Especially if it dips below the $5000 mark (it is currently $3800). This with the hope to make some decent profit even if it just pushes back to $7000.
Some will hold on and speculate on a return to previous highs – and so the bullish and bearish cycle continues.
Authorities including the delegates at the Davos talks were in agreement, however, that they will want it at affordable prices. At a level that stays relatively stable they may even start to consider it as ‘global legal tender’.
But that will be a long time especially if traders continue to buy it speculatively to make profits.
Those awaiting a total crash of Bitcoin, altcoins or the blockchain, however, would have to hold their breaths under the water.
The technology is indeed a game changer and has already been widely adopted.
It will only change form to be partially or fully regulated.