Drivers of the Cryptocurrency Market and Reasons for Anticipating Market Stagnation in 2024
The cryptocurrency market experienced one of its worst moments in 2022. In contrast, 2021 was a year of significant growth for the crypto industry. The Covid-19 pandemic played a positive role in accelerating the adoption of cryptocurrencies and their underlying blockchain technology.
Despite the enthusiasm of several analysts for 2023, there are reasons to believe the crypto market might stagnate until the second half of 2024. But before we discuss those projections, let us review the factors that drive the cryptocurrency market and are likely to generate significant changes in this industry.
Drivers of the Crypto Market
Cryptocurrencies’ prices are determined by supply and demand. In layperson’s terms, if more people want to buy crypto than people want to sell, then, theoretically, the price will increase. The opposite is also true. The price will drop if more people want to sell than those who want to buy. However, knowing the factors driving people to buy or sell crypto is more critical. While there are many factors, one can summarize them as follows:
- Fundamentals,
- Macroeconomic conditions,
- Sentiment,
- Technical forces.
All these factors are linked to each other, and they do not impact the crypto market separately. Let us briefly describe each of them.
1. Fundamentals
The term ‘fundamentals’ is commonly used in stock markets to refer to factors that ultimately impact a company’s profits, growth, and financial health. In crypto, the term is used similarly but with some restrictions. Since many cryptocurrencies do not generate profit by themselves, they do not have any fundamentals as described above.
Hence, other metrics are used to characterize crypto fundamentals, such as the increase of network addresses, node count, number of decentralized applications (DApps) running on a cryptocurrency’s network, scalability, network security, and potential usability in real-world use cases. Since scalability is a critical fundamental aspect of a blockchain, it is separately assessed by three key concepts: security, speed, and decentralization.
Another important factor is technical development, referring to any significant advancement or improvement in the cryptocurrency’s underlying network. These technological changes can significantly impact a cryptocurrency’s price. For example, the Ether (ETH) price increased in the last few months due to The Merge, Ethereum’s major upgrade.
2. Macroeconomic Conditions
The crypto market does not exist as an isolated entity. Macroeconomic conditions affecting the global economy can significantly impact the crypto market. For instance, an economic recession can force people to refrain from spending money or investing. Since cryptocurrencies are generally risky investments, most people are quick to sell their crypto investments in adverse economic conditions. Hence, cryptocurrency prices might be affected by the abrupt change in supply. Conversely, investors are more willing to invest in risky instruments in a strong economy, leading to higher demand for crypto assets.
For the above reasons, crypto market participants are continuously keeping an eye on interest rates and inflation. When inflation grows, central banks respond by raising interest rates. However, high interest rates could lead to a recession in the economy, which could hurt the crypto market.
3. Sentiment
Sentiment refers to factors affecting people’s desire to buy or sell a specific cryptocurrency based on emotions. Sentiment is closely linked to news and social media hype about a particular coin or token. For example, suppose a celebrity or influencer endorses a cryptocurrency via social media. In that case, users may experience a fear of missing out (FOMO) and rush to buy the crypto asset, even without knowing much about it (like the fundamentals). The result is higher demand, which increases the crypto price.
On the other hand, people might read a lot of bad news about a cryptocurrency, leading to fear, uncertainty, and doubt (FUD) about that crypto asset’s future. In such cases, most people rush to sell their crypto holdings, causing the price to drop.
4. Technical Forces
Some external forces could impact the crypto market by altering the demand and supply for a specific coin. For instance, many traders use trading signals to decide when to buy (or sell) a particular cryptocurrency. Some of these signals are very popular, and most traders use them. Hence, the simultaneous use of these signals can lead to situations in which many people buy or sell a specific cryptocurrency, significantly impacting its price.
Will the Crypto Market Stagnate in 2024?
Nobody can deny that 2022 was one of the worst years for the crypto market. The LUNA-UST crash in May of that year and the FTX implosion in November were some of the most evident reasons for the price drop of many cryptocurrencies, including Bitcoin. Yet, the U.S. Federal Reserve policy of tapering and raising interest rates likely played a more significant role in triggering the crypto winter in 2022.
We are about to start the last quarter of 2023, and the situation remains unchanged. The Fed rate hikes have not allowed the crypto market to enter a bullish trend. Hence, the crypto market will likely stagnate for the year's remainder. For the crypto market to build a sustainable bull run, the U.S. government must use quantitative easing with low interest rates and economic stimulus.
Some analysts suggest a bubble might be forming in the consumer loan sector. To date, it has grown to nearly $1 trillion. This sector could collapse if many borrowers default on their loans. In such a case, the government would be forced to provide stimulus to solve the issue. When will the bubble burst? It is difficult to predict, but it could coincide with the recession’s end, toward the end of 2023 or early 2024. Until then, the crypto market will likely stagnate. Elon Musk, the wealthiest man on the planet, believes the crypto market stagnation may last until the next Bitcoin halving, scheduled to occur on May 1, 2024.
Conclusion
Many analysts share the opinion that the worst part of the current crypto winter is over. However, the crypto market will likely remain in a downtrend for a few months. A global recession has prevented the crypto market from entering a bullish run. Macroeconomic data points toward market stagnation until Q1 or Q2 2024. The Bitcoin halving on May 1, 2024, could initiate a significant trend change in Bitcoin’s price performance. As a result, we could see positive performance of the crypto market again. So, it might be profitable to invest in stagnated cryptocurrencies, hoping for a bullish run next year. If you want to invest in some of the most promising cryptocurrencies, you can use LetsExchange.io to purchase such digital assets at competitive rates.
Disclaimer
Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn’t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.