Ever since Bitcoin was created, people have been speculating how much it will appreciate (or depreciate) in value as time goes on. It really seems like there is an article every day that predicts Bitcoin’s price to be anywhere between 0 and 1 million “really soon”. Do not worry, this blog post is NOT another price prediction. Instead, we want to take a minute to analyze what really influences the price of Bitcoin and other cryptocurrencies both in the short and long term.
Why is cryptocurrency so volatile?
This is a question that isn’t asked as often as it should be. Among the major objections to crypto from the average person, volatility is up there along with its involvement with criminal behavior and the fact that many people have a hard time wrapping their heads around this new technology. Although all three topics are super juicy, this article deals with Bitcoin’s price so that is what we are going to focus on here.
The reason why Bitcoin and many other cryptocurrencies are so volatile is because nobody really knows how to feel about them. In other words, there is a lot of speculation regarding the value of Bitcoin and basically every other cryptocurrency out there. As regulators slowly start to warm up to cryptocurrency and start to build frameworks which make them more appealing to legacy investors, there is really only one direction that Bitcoin and other cryptocurrencies will go in the future: up.
What causes Bitcoin’s price to rise or fall?
Whenever there is a huge change in the price of Bitcoin (or any other cryptocurrency), both people in crypto news and social media (especially crypto Twitter) are quick to start pointing fingers at what was behind the sudden price movement. The reality is that it is nearly impossible to pin down the exact cause of a price movement with few exceptions (such as the coronavirus flash crash in March of this year). That being said, if you did know every single little element involved and had a much wide vantage point of what’s going on, you could have a pretty good sense of what the market is likely to do next.
This is why professional traders both inside and outside of cryptocurrency are constantly looking at news and social media activity. They know that it is these two sources which influence how investors will feel, and how investors feel is fundamentally what drives the price of an asset, whether its crypto, gold, or Tesla stock. This also happens to be the value proposition for our mobile app and desktop terminal. We track the sentiment of the news and social media about 3000+ cryptocurrencies using an AI that tracks 50 000 sources. It gives you a much clearer picture of how people are FEELING about the market at any given time and also lets you access all of the relevant news and social media about your favorite cryptos in one place (even YouTube videos!). This allows us to generate two sentiment indicators that traders can use to maximize returns and hedge losses.
How to predict Bitcoin’s price
Okay, so now that we have laid down a few foundational ideas, we can start putting together a mental image of how Bitcoin’s price changes. Some positive news comes out about Bitcoin (for example, the announcement 2 weeks ago that US banks could now custody crypto assets). This draws the attention of both individual and institutional investors who speculate (correctly) that this will likely lead to an increase in demand for Bitcoin and other cryptos. They buy Bitcoin ahead of the curve and wait for the wave of investors to arrive. It does, and they sell the top when questions start coming out about how long this bull market can last.
A brief aside: yet another thing that is often overlooked is the size of the cryptocurrency market in relation to other assets like gold. The entire cryptocurrency market has a market cap of around 320 billion US dollars at the time of writing. While this is quite impressive, it is dwarfed by gold’s 9 trillion US dollar market cap. Given that Bitcoin’s use-case is arguably as a store of value, and its market cap is around 200 billion US dollars, it is not unreasonable to eye a market cap of around 1 trillion for Bitcoin and certainly for the whole cryptocurrency space over the coming years.
Now, back to our example. The general pathway is this: news drives how investors feel, and how investors feel is what drives the price of an asset. However, we know that this is a sort of bi-directional relationship. When heavyweights like Warren Buffett make a certain investment or even come out and critique a certain asset, this is sure to have an affect on the price of the stock or asset in question at least for the short term. The price can also influence news sentiment and social sentiment. This is why we cannot say that apps like ours predict Bitcoin’s price. The complex relationship between price, social media, and news makes it really hard to figure out which metric is the best “forecaster” of Bitcoin’s price and when that metric should be used.
Despite this setback, over the past few months our app has caught spikes in both news and social sentiment moments before cryptos like Bitcoin and Ethereum went off to the races. The screenshots you see in this article were sent to us directly by our users! To make things even more promising, one cryptocurrency trader has been rigorously testing our sentiment analysis indicators with his trading bot and found that it gives him an over 200% return compared to trading off of price-based indicators alone. We are still working to improve our technology and have a lot of research in progress to see how we can further optimize these indicators to make our users (and investors) more profitable.
Our app and desktop terminal are free to use but free users only get access to Bitcoin data. If you’re serious about trading cryptocurrency, you might want to consider buying the premium version of our mobile app (4.49$USD per month) or even our powerful desktop terminal (99$USD per month, includes premium subscriptions to the CryptoMood app and WhaleTrace whale transaction tracking app). Better yet, we now offer a No Risk Guarantee that gives you a full refund within 24 hours of purchase if you are not happy with what you see on our terminal.
Give it a shot – be ahead of the curve!