Valuation of Cryptocurrencies

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1.4 Influence of News & Gossip on the Market. Key Influences

The cryptocurrency market moves as a result of business and financial news just like the traditional markets do. There have been several noteworthy instances of cryptocurrencies moving in reaction to relevant news articles. We will examine those situations in more detail in the next section. 
First, there are common topics and key influences which generally affect the valuation of cryptocurrencies. These various factors can be broadly categorized into Time, Initial Project Valuation, Exchange Listings, Project Developments, Project Characteristics, Cryptocurrency Team Members, Community Acceptance, Use Cases, and Government or regulatory sentiment.
There is a common saying among traders from traditional markets:

“Buy the rumor, sell the news”

1.4 ) Influence of News & Gossip on the Market. Key Influences

The lesson to be taken from this saying is: Yes, news surrounding any of the aforementioned factors can affect the price of cryptocurrency assets, but it is not that simple. By the time most people see the news in front of their eyes, it is already too late. They would have been better off buying when the news was just a rumor. By the time the news is in the headlines, the smart money that was in early is happily selling to the less-well informed investors buying in later.

1.4 Influence of News & Gossip upon the Market. Key Influences

1

Time

Time influences many of a coin’s valuation characteristics in the market. Larger coins like BTC and ETH might trade more like a security or commodity does. ICO tokens might trade similarly to early-stage securities. Time is the purifier. As time passes and more and more trades take place, the true value of the token or cryptocurrency is revealed. Unsupported or overvalued tokens are sold off, while undervalued tokens are bought and their price will rise.

This is the nature and function of the free market. Prices do not move based solely on fundamentals. Market sentiment and investor opinion are indispensable factors to consider in trying to understand or predict market movements.

1.4 Influence of News & Gossip upon the Market. Key Influences

2

Project Valuation

Every cryptocurrency project will prepare and release a whitepaper to commence business operations. The whitepaper includes the underlying business model, the strategy, and the financial fundamentals which all underpin the valuation of the project.

For example, a review of Cardano (ADA) suggests that the coin is the best placed competitor to Ethereum. Its creator is one of the top members of Ethereum’s development team; and ADA also allows smart contracts to work upon its underlying technology, like Ethereum does. In the past, the ADA price has moved in a positively correlated manner to that of ETH due to their similar underlying technical and strategic positions.

1.4 Influence of News & Gossip upon the Market. Key Influences

3

Exchange Listings

Since exchanges are where most cryptocurrency trading takes place, the fact of listing or delisting of coins on cryptocurrency exchanges will greatly influence the price. 
Cryptocurrency projects have to follow a specific series of procedures to be listed on each particular exchange. Cryptocurrency investors believe that as a coin gets listed on more exchanges, that gives the project more exposure, and helps establish the authenticity of the project. The bigger the exchange is, the greater the influence listing or delisting will have on the price.

1.4 Influence of News & Gossip upon the Market. Key Influences

4

Project Developments

As a token or cryptocurrency grows in size in its specific industry or sector, its roadmap and developmental plans become major factors that can influence its price. Events such as a Hard Fork or SEGWIT, for example, are major developments to watch out for. Every cryptocurrency project has a PR function to disseminate news to investors and to the public.

Coinmarketcap is a good channel for receiving such information.

It is arranged in such a way that when you click on a cryptocurrency, it brings up the latest news, cryptotalk.org forum posts, and news reports. CoinMarketCalendar also helps you to catch up with cryptocurrency related events.

1.4 Influence of News & Gossip upon the Market. Key Influences

5

Project Characteristics

One of the most important qualities of money that helps to support its value in the first place, is that it should be scarce, the supply limited. Likewise, the total supply of a token defines its scarcity, affects it value, and greatly influences the price of that token. There are some projects that have billions of coins in circulation. Coins like Digibtye (DGB) have always been within the range of 1–1000 sats and never higher.

1.4 Influence of News & Gossip upon the Market. Key Influences

6

Cryptocurrency Team Members

People on the team come with their own personality, qualifications and history. Ideally, they bring good reputations, and help engender respect for the project. The participation of high-profile and well-regarded individuals can greatly influence the price. Investors will feel much more comfortable and confident about a project if they know someone on the team has a good reputation and a successful track-record in business.

Roger Ver is an outstanding example. He was an early adopter of Bitcoin, and a central figure in the hardfork of bitcoin’s blockchain that resulted in bitcoin cash. We can even say that bitcoin cash was in fact largely promoted and initially gained respect due to the participation and support of key individuals like Roger Ver.

John McAfee of McAfee Antivirus is another individual with power to influence the market. Towards the end of 2017 he started a campaign promoting certain cryptocurrencies. He was able to muster so much hype in the market that Verge went as high as 1200 satoshi on Bittrex. He did the same for several other coins before some people started accusing him of trying to profiteer off legitimate projects by dumping the coins upon exchange listing.

1.4 Influence of News & Gossip upon the Market. Key Influences

On June 11, 2018, ex-NBA star Dennis Rodman arrived in Singapore wearing a shirt promoting a coin for marijuana (PotCoin) with the website inscription www.potcoin.com on the shirt. Some people simply have tremendous visibility in the media for one reason or another, and that visibility may one way or another result in a major market move of which investors need to be aware.

1.4 Influence of News & Gossip upon the Market. Key Influences

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7

Community Acceptance

A large part of all cryptocurrency valuation is predicated on market sentiment and the belief by investors that the tokens store some certain degree of value. A cryptocurrency project needs to use a great deal of effort and time to ensure they are well-received and remain in good standing in the crypto investor community. Investors will decide the fate and valuation of a token in the market. You will recall that a digital asset, cryptocurrency, or token is different from a traditional equity, for example a share of Apple stock, because it has no underlying cash flow or collateral upon which you can calculate a verifiable valuation. The market value of a crypto asset is entirely dependent upon investors believing that somebody will buy their tokens for more than they are worth at the present moment.

1.4 Influence of News & Gossip upon the Market. Key Influences

8

Governmental Position

Of course, the entire crypto ecosystem and all of the cryptocurrencies contained within it, are all a relatively new innovation. Legal authorities in most countries are still trying to figure out this market so they can draft comprehensive legislation that will regulate but not destroy or un-necessarily impede technical innovation and progress. When the government of China for example clamped down on cryptocurrencies out of a concern for financial stability and social unrest, the price of all cryptocurrencies fell mostly because people were worried that Chinese investors and miners would withdraw from the market.

Cryptocurrencies may be unregulated and not controlled by a central authority; but the individuals who invest and participate are subject to all kinds of laws and regulations, and affected, directly and indirectly, by all kinds of central authority and control as well. Investors need to keep a close eye on news relating to cryptocurrencies and avoid being caught by any sudden or drastic changes to investor sentiment or access to the market.2.

Bitcoin

2.1 A Detailed Price History

Cryptocurrencies first gained the attention of a global audience with the innovation and release of Bitcoin. The study of cryptocurrencies can be dated back to the 1990s when a group of cypherpunks came up with specific ideas, principles, and pieces of technology that are mirrored in both theory and reality in many cryptocurrencies today.

2.1 A Detailed Price History

If you want to understand what bitcoin is, it is helpful to understand where bitcoin came from. It all started with people like Adam Back who created HASHCASH, Nick Szabo who started Bit Gold, David Chaum who started Digicash, Wei Dai who created B money, and Hal Finney who created RPOW. Each of these projects brought encryption more and more into the limelight. Then, not so long later, Bitcoin was able to evolve on that encryption and become the face of the cryptocurrency industry that it is today.

After its release in January 2009, Bitcoin started with a price of $0.00076, and the first bitcoin transaction was recorded between Satoshi Nakomoto and HaI Finney. On February 6, 2010, the first Bitcoin exchange was opened, called DWDOLLAR, with an opening price of $0.001.

A very popular story appeared on May 22, 2010, about a fellow who used 10,000BTC, worth $25 at the time, to buy 2 pizzas, also worth about $25 at the time, for the first actual transaction with BTC. The price of BTC at the time was $0.0025. Fast forward seven months later and see Bitcoin ended the year 32x higher, with a closing price of $0.08.

Needless to say; Would you prefer the pizza or the bitcoin today?

2.1 A Detailed Price History

The Silk Road was founded by Ross Ulbricht and opened on January 1, 2011 with an opening exchange price of $0.32 for one Bitcoin. On March 6, 2011, Jeb McCalleb sold Mt.Gox to Mark Karpeles, when Bitcoin was valued at $0.88. By April 23, there was BTC to Euros parity wherein 1 BTC was valued equally with 1 EUR.

After Erik Voorhees launched SATOSHIDICE the next day on April 24, 1 BTC was valued at $1.63USD. By June 2011, the price of Bitcoin had skyrocketed to $10. When the Bitcoin foundation was formed on September 27, 2012, 1 BTC was valued at $12.31.

By February, 2013, 1 BTC was at $30.26 and it kept increasing for the next month on its way to $86.18 on March 28, 2013. Bitcoin market cap was at $1billion USD. Erik Voorhees sold SATOSHIDICE for $11,500,000.

2.1 A Detailed Price History

The Winklevoss twins invested $1,500,000 into BitInstant when Bitcoin was at around $120. In August 2013, after a Texas Judge ruled that Bitcoin is a currency and Bloomberg included Bitcoin in its datasets with the stock ticker ‘BTC’, the price began to soar until it got to around $1200 in December 2013.

2.1 Detailed Price History

The infamous hack at Mt.Gox was a major blow to the community in 2014. But skip ahead a few years to December 2017 and Bitcoin reaches an all-time high of approximately $19,500.

One pattern that has emerged in BTC trading is a dramatic skew towards upward movements in price near the end of the calendar year.

This is a major trend pattern for technical analysts in studying BTC price behavior.

2.2 Key Price Movements

Now let’s consider specific factors affecting BTC valuation and the reasons behind the volatility and volume of trading.

In technical analysis, these first few years of BTC trading are called the ‘excitement’ stage. Bitcoin and the blockchain are seen as such an amazing innovation and such a momentous financial and technological breakthrough that there is no ceiling in sight, the price can go up as high as it wants to go. To the believers, the potential of bitcoin and blockchain technology is almost unlimited.

However, there were several major issues and developments that depressed the price, as you can see in the chart above. There were money laundering charges against Charlie Shrem (the CEO and co-founder of BitInstant). There was controversy about Silk Road (an online marketplace where people were able to buy drugs and carry out unlawful transactions with Bitcoin as the means of exchange). And then the robbery which led to bankruptcy and court proceedings against Mt.Gox, the world’s largest Bitcoin exchange, handling around 70% of all BTC trading at the time, in 2014.

2.2 Key Price Movements

The explosive bull run of 2017, before the sharp reversal and decline in the first half of 2018 clearly demonstrates the unprecedented volatility of this asset class. Fortunes can be made and fortunes can be lost faster than you realize. People were paying almost $20,000 for one BTC at the end of 2017, and selling it for just one-third of that price in 2018.

2.3 Influence upon the Broader Market

Bitcoin is the largest cryptocurrency by market capitalization and the most actively traded cryptocurrency on the majority of exchanges. In fact, most exchanges value other cryptocurrencies and tokens in Satoshi.

Many technical analysts have noted that when Bitcoin is undergoing a bull run, there is a significant negative effect upon the broader market. This is the result of money being pumped into Bitcoin either from outside the system, or from the sales and reallocation of funds from other cryptocurrencies into BTC.

However, there are also a few cryptocurrencies that are positively correlated with the movement and momentum of Bitcoin’s price.

2.3 Influence upon the Broader Market

The other major cryptocurrencies, typically those within the top five to ten ranked by market capitalization, will rise when the price of Bitcoin rises. The opposite is also true. When the price of Bitcoin falls, so too does the price of these other major coins.

There are a few primary reasons to consider from a behavioral perspective. The vast majority of money, both retail and sophisticated, has been made in Bitcoin, Ethereum and Ripple. When these coins appreciate in price there is a significant wealth effect upon the industry. Investors in cryptocurrencies are just like anyone else. They suffer the same emotions, the same greed and the same fear, when their investments go up and down in price. They become exuberant. They become depressed.

2.3 Influence upon the Broader Market

The price of bitcoin is, for the moment at least, one of the single largest drivers of other cryptocurrencies price action. But it will not be like this forever. There are always new cryptocurrencies and ICO projects coming out. The market will continue to diversify and the proportion of BTC total market capitalization will continue to recede.

2.4 Notable Periods

We are going to focus on four especially notable periods in the history of bitcoin.1

Crash of Mt.Gox Cryptocurrency Exchange

Mark Karpeles bought the Mt.Gox business in order to earn money from operating the exchange. He was not technically experienced, and he was not particularly inter

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