Golden Observation | The continued decline in encryption has caused concerns: What are the main factors affecting the market outlook?

In view of investors' concerns about continued high inflation and the collapse of the Terra USD stablecoin, Bitcoin and other cryptocurrencies ushered in a sharp drop this month, and the overall market is still sluggish so far. While for trend traders, major factors such as governments, international transactions, speculation and expectations, and supply and demand cause long-term trends and short-term fluctuations, understanding how these major factors shape trends over the long term can provide insight into how future trends may occur.

government

Governments have a lot of leverage 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 Fed can effectively slow or attempt to speed up domestic growth. This is called monetary policy. If government spending increases or contracts, this is known as 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 in the open market, governments can change the amount of investment flowing into and out of the country.

The impact of the Fed's policy on the encryption market is obvious to all. The release of the pandemic has allowed the encryption market to develop rapidly, and as the Fed's quantitative tightening accelerates, the impact on the encryption market is also obvious.

Bank of England Deputy Governor Jon Cunliffe recently 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 a question about whether rising interest rates will increase the pressure on cryptocurrencies, Cunliffe said: I think as this process continues, as (quantitative tightening) starts in the United States, I think we will see a transfer of risk assets. Cunliffe also discussed another factor affecting the crypto market. He noted that the Russia-Ukraine war is prompting investors to move money into safer assets.

Of course, the government's policy is also one of the important influencing factors for the development of the encryption market. Regulations and bans in related fields tend to have knock-on effects 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 the country's economy and currency. Countries that primarily export, whether in physical goods or services, are constantly bringing money into the country. This money can be reinvested and can stimulate financial markets in these countries.

For cryptocurrencies, Russia began to seek to recognize the legal status of encrypted assets before the conflict broke out, and after the conflict broke out, in order to get rid of US dollar sanctions, it expressed its willingness to consider using BTC and other encrypted assets to settle international natural gas transactions. The trend of BTC has changed significantly. 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 anticipation

Speculation and anticipation are part of the financial system. Consumers, investors, and politicians all have different views on where they think the economy will go in the future, and this affects how they behave today. Expectations of future actions depend on 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, as well as other forms of fundamental and technical analysis, may produce biases or expectations about future prices and trend directions.

Speculative and anticipatory indicators have had a significant effect on crypto markets. Market sentiment such as speculation and expectations largely affects market sentiment, thereby affecting crypto investment. When panic spreads in the market and the number of short sellers gradually increases, the sentiment is brewing to the extreme, often prompting the market to usher in an inflection point.

Speculation about price movements is created by traders' and investors' analysis and resulting positions based on 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. Analytical errors by market participants can also perpetuate trends. When they are forced to exit losing trades, this further drives the price in the current direction. As more and more investors profit from the trend, the market becomes saturated and the trend reverses.

Of course, but for long-term holders, holding firm also seems to be a good choice. For example, MicroStrategy software company is one of the firm holders, and its CFO recently pointed out that despite the recent decline in BTC, it does not intend to sell any bitcoins. The encryption market often also develops continuously because of the existence of these long-term holders.

Supply and demand

Supply and demand affect individuals, companies, and financial markets as a whole. In some markets, such as commodities, the supply is determined by the physical product. The supply and demand for oil are constantly changing, adjusting the price that market participants are willing to pay for oil today and in the future. Oil prices can see a prolonged rise as supply dwindles or demand rises, with market participants bidding to secure what appears to be a limited supply of the commodity. Suppliers want higher prices for the products they have, and higher demand drives up the prices buyers are willing to pay.

Financial markets have a similar dynamic. Stocks fluctuate on both short- and long-term scales, creating trends. The threat of supply drying up at current prices has forced buyers to pay higher and higher prices, resulting in sharp price increases. If a large number of sellers enter the market, this will increase the supply of existing inventory and may push prices lower. This happens on all time frames.

For the crypto market, factors that affect supply and demand include the enthusiasm of buyers on the one hand, and are also affected by its halving effect on the other.

Obviously, when buyers actively pour in, it will promote the increase of market price. On the other hand, the BTC halving effect often brings about an increase in prices. Statistics show that past Bitcoin halvings have all resulted in significant price increases. Some patterns are easily identifiable when we look at past halvings, with Bitcoin’s price rising sharply after a halving, but followed by an extended bear market, before recovering again at the next halving. We can see this trend continuing.

As mentioned above, trends are generally created by four main factors: governments, international transactions, speculation/anticipation, and supply and demand. These domains are all linked because expected future conditions shape current decisions, and current decisions shape current trends. Finally, changes in supply and demand create trends as market participants compete for the best price.