Introduction
Some analysts think bitcoin (BTC) is immune to global financial shocks; they claim it’s a hedge against inflation and a sure bet against waves of uncertainty.
The media claims otherwise. Exogenous market shocks and other factors that do not affect traditional financial goods, such as international regulation and social media, are all mentioned in several news pieces.
We’ll go over the significant catalysts that cause the price of bitcoin to drop or spike in this article.
Market Events
Cryptocurrencies frequently tumble in lockstep with global markets. When the coronavirus outbreak hit the world markets in March 2020, bitcoin went down with it. Bitcoin dropped by 57 percent to $3,867 in a week in mid-March.
Then, like the stock market, it recovered and became even stronger, reaching new highs the following year. Analysts believe this was owing to the surplus time and disposable income that some retail traders had during the coronavirus pandemic and the stock market’s buoyancy.
Other market shocks have also caused Bitcoin to react. For example, bitcoin dropped 6.9% in late 2021 as traders worried that Evergrande, the Chinese real estate behemoth, was likely to collapse, and again in late 2022 when Didi announced plans to delist from the New York Stock Exchange. It has reacted positively to inflation, rising in tandem with consumer goods and material prices.
Even though it is impossible to list all of the economic shocks that affect bitcoin, there is enough evidence to suggest that bitcoin follows global markets to some extent.
Volatility is not influenced by “most scheduled U.S. macroeconomic news announcements,” according to research published in the Journal of Economic Dynamics and Control in 2020, but the seas turn choppy when “forward-looking measures, such as the consumer confidence index,” are published.
Overleveraging in the financial system magnifies these shocks and increases volatility. When a trader leverages, he borrows money from the exchange to boost his investing potential.
Rather than trading with $1,000 of your own money, some exchanges historically permitted you to borrow up to 100 times your initial deposit, allowing you to trade with $100,000.
When a significant number of highly leveraged traders all bet on bitcoin’s price moving in one direction, it opens the door for other large investors (whales) to move the price in the opposite direction.
This causes a chain reaction of liquidations, causing bitcoin’s price to plummet and enormous paper losses for leveraged long traders. The whales can now purchase bitcoin at a significantly lower price than before.
Finally, weekends can substantially impact bitcoin price volatility, believe it or not. During these times, fewer traders actively monitor the markets, which means there is less resistance when prices fall and less profit when bitcoin surges. This can frequently result in larger price swings in both directions.
International Regulation
Because it defines which markets may access bitcoin, where enterprises can set up shop, and where bitcoin miners can operate, international legislation significantly impacts its pricing.
While countries such as the United Kingdom, Thailand, and India have demonstrated to directly impact on bitcoin’s price, the United States and China had the greatest impact.
Bitcoin’s depreciation from near $65,000 in April 2021 to around $35,000 by mid-June was mainly due to China’s restriction on bitcoin mining. When the Chinese government declared cryptocurrencies illegal in September 2021, Bitcoin dropped 5.5 percent.
Bitcoin reacts to news from regulators and legislators in the United States. President Joe Biden’s infrastructure plan in 2021 harmed bitcoin’s price because it made it impossible for decentralized wallet companies to provide tax data on their users, which they do not gather by nature.
It’s not all horrible, though. Bitcoin also reacts favorably to good news. The bitcoin price increased by roughly $3,000 in October 2021 due to expectations that the U.S. Securities and Exchange Commission would approve a bitcoin future exchange-traded fund.
Traditional Finance
Traditional financial moves can help or hurt bitcoin’s price since they decide how easy it is for financial powerhouses like Wall Street to invest in cryptocurrency. You can also invest in bitcoin yourself, online or by buying bitcoins in person.
Moves that encourage more money to flow into bitcoin, such as large banks providing bitcoin to their customers, are frequently correlated with price increases. Traders are wary of negative news, such as a Wall Street titan criticizing bitcoin.
When prominent corporations declare that bitcoin has been added to their balance sheet, bitcoin often rises. After companies like MicroStrategy and Tesla invested in bitcoin, the price of bitcoin skyrocketed.
In contrast, the overall market valuation of cryptocurrency plummeted from $2.43 trillion to $2.03 trillion after Tesla CEO Elon Musk announced that the company would stop accepting bitcoin payments in May 2021 due to environmental concerns.
Traditional financial products, particularly derivatives that represent contracts that monitor the underlying price of BTC, can impact the market price of bitcoin.
As we’ve already covered, leveraged futures trading can cause significant price swings, but so can other products like crypto options. In a nutshell, crypto options allow investors the right, but not the responsibility, to purchase or sell the underlying asset (in this case, bitcoin) at a specific price (known as the strike price) before or on a specific date.
When a high number of out-of-the-money (OTM) bitcoin options expire simultaneously, the market volatility of bitcoin can be affected.
When options are not lucrative, they are referred to be OTM. When the strike price (the negotiated price to buy the underlying asset) is greater than the current market price, a call option (the right to buy the underlying asset) is deemed out-of-the-money.
Big investors, such as market makers, often hedge with the underlying asset before expiry to avoid long-term losses if bitcoin moves in the opposite direction.
Social Media
The distinctions between traditional finance and social media influence can blur when tech CEOs are all over social media. Retail investors appear to be more attentive to prominent influencers’ views regarding bitcoin.
Bitcoin increased by more than 20% after Elon Musk updated his Twitter bio to bitcoin, signaling to retail investors that Musk might be poised to invest in bitcoin, which he did later through Tesla. This is in addition to the CEO’s significant control over other assets, particularly dogecoin.
Conclusion
Any changes in any of the above-listed elements are instantly published and widely circulated. As a result, positive news for cryptocurrency investors tends to raise the price of Bitcoin, while negative information tends to lower it.
One of the most important elements driving cryptocurrency prices is investor sentiment, which is influenced by a combination of supply, demand, production costs, competition, regulatory changes, and subsequent media attention, as mentioned above.
