We’ve seen an influx of investor interest and volatility in the cryptocurrency space, and Bitcoin in particular. The significant changes in cryptocurrency prices have investors wondering whether they are missing out on historic gains or are facing detrimental losses by having a stake in the game. In 2017 alone, we watched Bitcoin climb from below $1,000 per BTC to an incredible $19,783.21 per BTC.
Now, priced back around $10,000 per coin, Bitcoin appears to be stabilizing but familiar investors know all too well not to expect anything to stay stagnant in the cryptocurrency arena. We’re taking a deep dive to determine four factors driving cryptocurrency price fluctuations.
Perceived Value
One reason cryptocurrency prices may fluctuate against fiat currencies (dollar, sterling, etc.) is the perceived store of value versus the fiat currency. A store of value is any form of wealth that maintains its value without depreciating. For instance, fiat currencies are managed by governments and experience increases and decreases in value based on the economy’s strength or weakness. However, Bitcoin’s store of value, for instance, operates more like precious metals, as it has a fixed quantity, only 21 million BTC are in existence. Because Bitcoin’s value differs from that of fiat currencies, investors may choose to increase or decrease their holdings based on economic conditions.
Security
News coverage of thefts and exchange hacks is another factor affecting the price of cryptocurrencies, like Bitcoin, Ethereum and Ripple. Negative stories drive investor fear and sell offs, in turn causing price volatility. Cryptocurrencies stored online are vulnerable to security breaches as there is nothing physical removing them from the reach of hackers, just digital encryption mechanisms. However, investors who see the opportunity in digital currencies can avoid such exposure by using cold-storage devices to securely store their Bitcoin offline.
Taxes
In October 2017, the Internal Revenue Service announced that Bitcoin, and other cryptocurrencies, is considered an asset for tax purposes. This announcement had mixed outcomes for pricing volatility, on a positive note cryptocurrency valuations benefits from public acknowledgment of them as an official assets. Conversely, some investors interpret the announcement from the IRS as a signal that the agency may be preparing to implement more regulatory oversight in coming years.
Public Perception of ICOs
Initial Coin Offerings exploded in 2017, many of them attracting new investors to the cryptocurrency space by offering the potential for grandiose returns. What many investors fail to understand is that ICOs are not the same as cryptocurrencies, while they are similar, an ICO is a means of fundraising through which companies sell their underlying crypto tokens in exchange for cryptocurrencies, typically Bitcoin and Ethereum. Unfortunately, a number of fraudulent ICOs were able to take advantage of investors and have since disappeared, in turn corroding trust those investors put into the space. This negative perception has carried over to affect the broader reputation of digital currencies affecting adoption rates. On a positive front, there are a number of legitimate ICOs on the market that are working not only to abide by SEC rules, but to build a trustworthy ecosystem.
While all the above factors certainly play a role in what drive cryptocurrency prices to peak and trough, the true underlying causes are still greatly unknown. Bitcoin, Ethereum, Ripple, Litecoin and others are part of an emerging market which lacks historical data and an educated understanding of how they perform given varying market conditions. Cryptocurrencies are poised to fundamentally change the financial landscape, despite the “normal” 20 percent price volatility!