What causes price moves in cryptocurrencies?

[LukeZen]

And I don't mean the simple "supply and demand" explanation, but the actual mechanic behind that explanation that makes the price move.

Are there different orders at different price levels as we can see in futures for example? If sellers pull, then the price moves up to that level, if there are 500 sell orders at a certain price and buyers buy all of them then price moves up, etc. etc.

Does cryptocurrency market functions that way? if so, what role does the blockchain technology play in how the orders move in that market?

 

[Hoi]

And I don't mean the simple "supply and demand" explanation, but the actual mechanic behind that explanation that makes the price move.

Are there different orders at different price levels as we can see in futures for example? If sellers pull, then the price moves up to that level, if there are 500 sell orders at a certain price and buyers buy all of them then price moves up, etc. etc.

Does cryptocurrency market functions that way? if so, what role does the blockchain technology play in how the orders move in that market?

Good question, but actually very difficult to answer. As there are soooo many differences with markets we all used to (stock, futures, options, FX, etc.).

I can give you some of the most important differences:

a) some crypto-currencies (especially Bitcoin) has a generic use: payment-processors (like BitPay and Coinbase) are directly linked to one or more exchanges and will immediately convert any Bitcoin purchase (of a good in a shop) into fiat. So hundreds of thousands of (small) companies exchange Bitcoin at what ever bid in the book, which will not hold any line a technical-analyst has drawn!

b) Because exchanges aren't considered a safe place to park your Bitcoins (unlike broker/bank accounts) there aren't any (large) market-makers. So the books aren't filled at all. This is the cause of more volatility than on normal markets.

c) Considering (b): traders will move their coins and fiat to and from exchanges depending on the opportunities. But moving takes time. So expect hours or days delay before the market responses with new orders.

d) It's a 24/7 market. The whole world is involved and you need to understand that the USA isn't that important at all. Actually the largest exchanges are out side America.

e) The phenomenon "Hype" (and "Fear") is an important factor and flows around the globe. Currently Japan is very important next month some other country.

f) this hype is also present between the crypto-currencies themselves. Ethereum was the place to be for several months, currently its leaking again to Bitcoin.

g) Miners have large amounts of coins, which they need to sell to cover their costs (electricity and hardware). But they will hold (Hodl) as well and sell with inside-knowledge.

h....z) many more ....

 

[just21]

Being legalised by a new country makes it go up. Disagreement between miners and coders potentially leading to a fork makes it go down in the short term.

 

[SteveM]

Delusion and reality.

 

[lovethetrade]

b) Because exchanges aren't considered a safe place to park your Bitcoins (unlike broker/bank accounts) there aren't any (large) market-makers. So the books aren't filled at all. This is the cause of more volatility than on normal markets.

That's probably a contributing factor but i think the main reason for volatility is due to the mix of participants and the asset being traded. Cryptocurrencies have no intrinsic value so the only thing that gives it value is investor confidence and market sentiment. Unlike shares where you know its intrinsic (fundamental) value based on its net assets and projected earnings etc, cryptocurrencies have no such value so one cannot determine if the market value is at a premium or discount to its intrinsic value. There's no support base to work with when investors lose confidence. A cryptocurrency can be worth $400 one day and $1 the next and investors can't differentiate between the two values when the sentiment changes. That makes it a unique but fickle market to begin with and the big players know this. As soon as investors lose confidence, the big players will continue to promote the ideal conditions for it to go down, buyers will come back into the market at certain levels but their efforts will fade out and sellers take over driving the price down. The buyers that get caught exit their positions and then volatility increases as fear sets into the market from all investors in the currency exiting their positions. The only remaining rationale for a base was the 200-day moving average and it seems to have bounced off it but there's still a chance cryptos and in particular ETH will drop even further if that base doesn't hold.

Cryptocurrencies are an excellent market for 'trading' due to the clean volatility but not so ideal for 'buy and hold' investing (IMO)

 

[wintergasp]

Good question, but actually very difficult to answer. As there are soooo many differences with markets we all used to (stock, futures, options, FX, etc.).

I can give you some of the most important differences:

a) some crypto-currencies (especially Bitcoin) has a generic use: payment-processors (like BitPay and Coinbase) are directly linked to one or more exchanges and will immediately convert any Bitcoin purchase (of a good in a shop) into fiat. So hundreds of thousands of (small) companies exchange Bitcoin at what ever bid in the book, which will not hold any line a technical-analyst has drawn!

b) Because exchanges aren't considered a safe place to park your Bitcoins (unlike broker/bank accounts) there aren't any (large) market-makers. So the books aren't filled at all. This is the cause of more volatility than on normal markets.

c) Considering (b): traders will move their coins and fiat to and from exchanges depending on the opportunities. But moving takes time. So expect hours or days delay before the market responses with new orders.

d) It's a 24/7 market. The whole world is involved and you need to understand that the USA isn't that important at all. Actually the largest exchanges are out side America.

e) The phenomenon "Hype" (and "Fear") is an important factor and flows around the globe. Currently Japan is very important next month some other country.

f) this hype is also present between the crypto-currencies themselves. Ethereum was the place to be for several months, currently its leaking again to Bitcoin.

g) Miners have large amounts of coins, which they need to sell to cover their costs (electricity and hardware). But they will hold (Hodl) as well and sell with inside-knowledge.

h....z) many more ....

Just to clarify on what you said. There are many safe places to park your bitcoins and there are fairly large market-makers active in bitcoins. But the transaction cost is too high to arbitrage most of the opportunity that you see. Exchanges are not places to hold your BTC, just a place to find a buyer and a seller.

There are not much inside knowledge in crypto currencies. I was involved in a (very) large mining project back in 2013 and I can guarantee you we had no idea when to sell and when to keep.

If I were you @LukeZen, I would buy and hold a bunch of crypto currency, that is of course, if you have the belief that cryptocurrencies can replace fiat currencies in the next 20 years.

If crypto CCYs represent 2% of the world's entire currency reserve, the price of a bitcoin should be at around 1m USD.

 

[Oysteryx]

Two things to add on to what has been said above:

1) As with everything bitcoin also moves on fundamentals/news. For example, the big move that started in April and skyrocketed in May can be explained by BTC becoming legal tender in Japan in April & the bitcoin scaling agreement of May23. Look out for relevant news and check the charts, you'll notice big reactions to significant events.

2) It is a very iliquid market. For good reasons. @Hoi explained it very well. I'd like to build on his answer by stating two reasons that explain the lack of liquidity:

2.1) Slow confirmations (taking up to 3 days) translate into slow transactions, its like a horribly slow back office - the way to bypass this caveat is having money parked at the exchange - but:

2.2) Trading happens mostly on exchanges, and exchanges also act as clearing houses, brokers & custodians. That is very dangerous. It is not wise to have too many assets in an exchange.

 

[Oysteryx]

That's probably a contributing factor but i think the main reason for volatility is due to the mix of participants and the asset being traded. Cryptocurrencies have no intrinsic value so the only thing that gives it value is investor confidence and market sentiment. Unlike shares where you know its intrinsic (fundamental) value based on its net assets and projected earnings etc, cryptocurrencies have no such value so one cannot determine if the market value is at a premium or discount to its intrinsic value. There's no support base to work with when investors lose confidence. A cryptocurrency can be worth $400 one day and $1 the next and investors can't differentiate between the two values when the sentiment changes. That makes it a unique but fickle market to begin with and the big players know this. As soon as investors lose confidence, the big players will continue to promote the ideal conditions for it to go down, buyers will come back into the market at certain levels but their efforts will fade out and sellers take over driving the price down. The buyers that get caught exit their positions and then volatility increases as fear sets into the market from all investors in the currency exiting their positions. The only remaining rationale for a base was the 200-day moving average and it seems to have bounced off it but there's still a chance cryptos and in particular ETH will drop even further if that base doesn't hold.

Cryptocurrencies are an excellent market for 'trading' due to the clean volatility but not so ideal for 'buy and hold' investing (IMO)

Great answer. Regarding your final statement, for me its exactly the opposite: great market to buy and hold or swing trade, not great market for short term trading (maybe because I haven't tried any short term trading on it, so I would not know).

 

[lovethetrade]

Great answer. Regarding your final statement, for me its exactly the opposite: great market to buy and hold or swing trade, not great market for short term trading (maybe because I haven't tried any short term trading on it, so I would not know).

Don't get me wrong, I'm buying and holding but I'm not an advocate of just buying at any price and parking it with the risk of losing all my capital allocation. I think a 66% retracement is more than what most investors can handle especially if they didn't buy at the bottom.

 

[Hoi]

Cryptocurrencies have no intrinsic value so the only thing that gives it value is investor confidence and market sentiment. Unlike shares where you know its intrinsic (fundamental) value based on its net assets and projected earnings etc, cryptocurrencies have no such value so one cannot determine if the market value is at a premium or discount to its intrinsic value.

Well, if you are saying that there is no Intrinsic value, then I’m afraid you haven’t understood it yet. If you want, then please read on.


First of all there are many definitions for “intrinsic value”. The one you pointing is:

“Economics: No intrinsic value exists for any good or service except its price (see use value) which is reflection of its demand and supply position and not of any inherent quality”.


But there are two other definitions which are more matching bitcoin’s realm:

“The actual value of an asset based on an underlying perception of its true value including all aspects, in terms of both tangible and intangible factors”.


And:

“Record keeping: Worth of a document expressed in monetary terms, due to some unique factor such as a signature, age, seal, or circumstances in which it was created”


Especially the last one is what makes that the bitcoin-protocol has Intrinsic Value. Just because in essence it is a Ledger! Keep that always in mind.

For as long as people exist, we register value (units of work) in Ledgers. They are extremely useful and thereby extremely valuable. Especially if you can offer a secure and immutable Ledger (ask your Notary). But all known Ledgers before 2008 weren’t that secure, there was always some single point of failure (corruption, fraud, war, etc.). Until 2008 when the bitcoin-protocol was invented (for which there will be a Noble-price once), which solved “trust in an untrusty environment”. A decentralized trust-less and immutable Ledger was born, which is storming the world in finance, accountancy and notary right now, as it’s so much better than what we had before.


Please read this post https://www.elitetrader.com/et/posts/4472699/.
There I explained that one full bitcoin, actually represents 100 million Ledger-rows. So if you own one you can register a lot in this immutable Ledger. Many see the Intrinsic Value of such rows, as they will be used in future for everything we as people use ledgers for. And as such, 100 million rows are now worth about $2000. Which I (and many investors who understand what this means) think is a bargain. In 10 maybe 20 years our world will use these ledgers massively. And the ledger which offers the most secure and useful features will be worth a lot. Currently, among all the crypto-currencies, it’s Bitcoin which is by far the most secure (it has the most accountants{miners} and is extremely stubborn to protocol changes). This means that when tinkering might change its security, prices will tumble (as its Intrinsic Value goes down).