The continued decline of cryptocurrencies has caused concerns: What are the main factors affecting the market outlook?

Given investors' concerns about continued high inflation and the collapse of the TerraUSD stablecoin, Bitcoin and other cryptocurrencies have plummeted this month, and the overall market remains sluggish so far. For trend traders, major factors such as governments, international transactions, speculation and expectations, and supply and demand lead to long-term trends and short-term fluctuations. Understanding how these major factors shape trends in the long term can provide insights into how future trends may occur.

government

Governments have a great deal of influence over free markets. The fiscal and monetary policies implemented by governments and their central banks have a profound impact on financial markets. By raising and lowering interest rates, the Federal Reserve can effectively slow or attempt to speed up growth within the country. This is called monetary policy. If government spending increases or contracts, this is called fiscal policy and can be used to help alleviate unemployment and/or stabilize prices. By raising or lowering taxes, changing interest rates, and influencing the amount of dollars available on the open market, the government can change the amount of investment flowing into and out of the country.

The impact of the Fed’s policies on the crypto market is obvious to all. The pandemic’s monetary easing has allowed the crypto market to develop rapidly, and as the Fed’s pace of quantitative tightening accelerates, the impact on the crypto market is also obvious.

Recently, Jon Cunliffe, deputy governor of the Bank of England, issued a warning to cryptocurrency investors at a Wall Street Journal conference. Cunliffe warned that cryptocurrency investors should expect more difficult times ahead. He explained that as the Federal Reserve and central banks around the world tighten financial conditions, investors will prefer safer assets. In response to questions about whether rising interest rates will increase pressure on cryptocurrencies, Cunliffe said: I think as this process continues, as (quantitative tightening) begins in the United States, I think we will see a shift in risky assets. Cunliffe also discussed another factor affecting the crypto market. He pointed out that the Russia-Ukraine war is prompting investors to move funds into safer assets.

Of course, government policies are also an important factor influencing the development of the crypto market. Regulation and bans in related fields often have a chain effect on the market in the short and long term.

International Transactions

The flow of money between countries affects a country's economic strength and currency. The more money that leaves a country, the weaker that country's economy and currency become. Countries that are primarily exporters, whether physical goods or services, are constantly bringing money into their countries. This money can be reinvested and can stimulate the financial markets of those countries.

As for cryptocurrencies, Russia began to seek recognition of the legal status of crypto assets before the conflict broke out, and after the conflict broke out, in order to get rid of the US dollar sanctions, it expressed its willingness to consider accepting the use of crypto assets such as BTC to settle international natural gas transactions. This news caused a significant change in the trend of BTC on the same day. Although it remains to be seen whether Bitcoin can become the main means of settlement and payment in some countries in the future, it is clear that the recognition of Bitcoin's status in international transactions has a significant impact on its price.

Speculation and expectations

Speculation and expectations are integral to the financial system. Consumers, investors, and politicians all have different views on where they think the economy is going in the future, which influences how they act today. Expectations of future actions are shaped by current behavior and shape current and future trends. Sentiment indicators are often used to gauge how certain groups feel about the current economy. Analysis of these indicators, along with other forms of fundamental and technical analysis, can generate biases or expectations about future price and trend directions.

Speculation and expectation indicators have a significant effect on the crypto market. Market speculation and expectations largely influence market sentiment, thus affecting crypto investment. When market panic spreads and the number of short sellers gradually increases, the sentiment brews to the extreme, often promoting the market to usher in a turning point.

Speculation about price movements is created by the analysis and resulting positions that traders and investors take based on the information they receive about government policies and international transactions. When enough people agree in one direction, the market enters a trend that can last for years. Errors in analysis by market participants can also perpetuate a trend. When they are forced to exit losing trades, this can further push prices in the current direction. As more and more investors profit from a trend, the market becomes saturated and the trend reverses.

Of course, for long-term holders, holding firmly seems to be a good choice. For example, MicroStrategy Software is one of the firm holders. Recently, its CFO also pointed out that despite the recent decline in BTC, it does not plan to sell any Bitcoin. The crypto market often continues to develop because of the existence of these long-term holders.

Supply and demand

Supply and demand affect individuals, companies, and entire financial markets. In some markets, such as commodities, the amount of supply is determined by the physical product. The supply and demand for oil is constantly changing, adjusting the price that market participants are willing to pay for oil today and in the future. As supply decreases or demand increases, oil prices can rise over a long period of time as market participants compete to obtain a seemingly limited supply of the commodity. Suppliers want a higher price for the product they have, and higher demand drives up the price buyers are willing to pay.

Financial markets have similar dynamics. Stocks move in short and long time frames, forming trends. The threat of supply exhaustion at current prices forces buyers to buy at higher and higher prices, creating a large price increase. If a large number of sellers enter the market, this will increase the existing inventory supply and may push prices lower. This happens on all time frames.

For the crypto market, factors affecting supply and demand include the enthusiasm of buyers on the one hand, and the halving effect on the other.

Obviously, when buyers actively rush in, it will promote the increase of market prices. On the other hand, the BTC halving effect often brings about an increase in prices. Statistics show that past Bitcoin halvings have led to a sharp increase in prices. When we look at past halvings, some patterns are easy to identify. The price of Bitcoin rises sharply after the halving, but then there will be an extended bear market, and then it will rise again at the next halving. We can see that this trend is still continuing.

As mentioned above, trends are generally caused by four main factors: governments, international transactions, speculation/expectations, and supply and demand. These areas are all linked together because expected future conditions determine current decisions, and current decisions determine current trends. Ultimately, changes in supply and demand create trends as market participants compete for the best price.