The cryptocurrency market is evolving from a once-niche digital asset to a global currency on its way to full integration into the global financial system. Alongside this growth, it’s becoming increasingly important for investors to understand the impact of global events on cryptocurrency valuations.
This article covers different factors and influences of international events on crypto asset valuations. We also offer some tips for investors formulating strategies to mitigate risk and maximize returns. Let’s take a look.
Evolution of Cryptocurrency as a Financial Investment
From its humble beginnings in 2008 to today’s $1.76 T market cap, cryptocurrency has evolved from a speculative curiosity to a recognized investment. The road to adoption is volatile and contentious, as crypto’s decentralized nature challenges traditional financial models and government control of money and monetary policy.
As we see with Blackrock and other firms’ spot ETF moves, TradFi investors, initially skeptical, are pushing crypto into mainstream finance. Many institutional investors are integrating cryptocurrencies into their portfolios. In the global south, millions of people in countries with unstable economies or limited financial services use cryptocurrency as a safe haven or source of capital.
Between crypto’s potential as an asset class and its on-the-ground utility, cryptocurrency meets existing demands in the global marketplace. But what factors affect its valuation? Let’s take a closer look.
What Affects Cryptocurrency Valuations – An Overview
In all investment marketplaces, macroeconomic forces affect fiat and cryptocurrency.
For a detailed technical exploration, you can check out S&P Global’s article Are crypto markets correlated with macroeconomic factors?
This chart from Crypto.com shows bitcoin price volatility increased dramatically after 2018, especially during the pandemic.
As native digital currencies, crypto valuations are also sensitive to unique influences. Understanding these drivers is critical to grasping market dynamics.
- Blockchain technology innovations can enhance a cryptocurrency’s functionality and efficiency, boosting its appeal and value.
- Developments like smart contracts, scalability solutions, and interoperability between different cryptocurrencies can significantly impact valuations.
- Regulations, or the lack thereof, significantly impact cryptocurrency prices. Positive regulatory news can lead to price surges, while restrictive policies cause declines.
- From acceptance to outright bans, global regulatory stances can have localized or international effects on market reaction and valuation.
- Public perception, driven by media coverage, investor attitudes, and stock market trends, heavily influences crypto valuations.
- News of large-scale adoption by corporations or influential figures can lead to price increases, while negative press or skepticism can lead to decreases.
- Fraud causes losses, which can sour investor interest.
- Wider adoption by individuals and businesses increases demand, thereby driving up prices. Regional events can create short-term demand spikes.
- Institutional investment from hedge funds or corporate treasuries lends credibility and stability, positively affecting valuations.
Global Economy Factors:
- Economic instability, inflation in fiat currencies, or financial market downturns can lead investors to seek alternative assets like cryptocurrencies, affecting their prices.
- Decisions and policies of central banks, particularly relating to monetary policy and interest rates, can indirectly impact the crypto market.
- Research and adoption of central bank digital currencies have an ongoing underlying effect.
Supply and Demand Dynamics:
- A limited supply of specific cryptocurrencies, like bitcoin’s capped supply, can drive up prices as demand increases.
- Release schedules of new tokens or coins (e.g., through mining or staking) can influence the available supply and, thus, the asset’s value.
Integration and Partnerships:
- Collaborations between cryptocurrency projects, established companies, or other crypto projects can drive value.
- Integration of cryptocurrencies into payment systems, financial services, and other industries enhances usability and demand.
These factors collectively contribute to volatile and dynamic cryptocurrency valuations, making market analysis challenging and intriguing for investors.
How Global Events Impact Cryptocurrency Valuations
As regional conflicts and uneven economic progress persist, the impact of global events on cryptocurrency valuations is ticking up.
A now-classic example was crypto’s response to the COVID-19 pandemic. As global economies faltered and central banks implemented aggressive monetary easing, investors flocked to cryptocurrencies as a potential haven, driving up valuations.
This reaction highlighted cryptocurrency’s role as an alternative investment during periods of uncertainty in traditional financial markets. It also demonstrated how global crises could accelerate the adoption of digital assets, impacting their price discovery.
The Venezuelan financial crisis had a significant impact on in-country cryptocurrency valuations. As Venezuela faces hyperinflation, economic instability, and devaluation of its national currency, many Venezuelans turn to cryptocurrencies like bitcoin as an alternative store of value and means of transaction.
This surge in demand within Venezuela contributed to increased South American cryptocurrency adoption and awareness, highlighting the role of digital currencies in economies facing financial crises.
So, does Venezuela’s experience prove that crypto is an overall solid hedge against inflation? Many industry watchers think so, while others believe the jury is still out on the final verdict.
Mitigating Risk from Global Events Impact on Cryptocurrency Valuations
Navigating the volatile cryptocurrency market landscape, especially in the face of global events, requires strategic planning and risk mitigation. Below are a few common approaches investors can consider to minimize potential risks.
Stay Informed About Global Events’ Impact on Cryptocurrency Valuations:
- Regularly monitor global news and financial trends to anticipate potential market impacts.
- Be prepared to adjust your investment strategy quickly in response to significant global events.
Diversification of Investment Portfolio:
- Spread investments across different asset types (crypto, stocks, bonds, etc.) to reduce reliance on any single market.
- Diversify across various cryptocurrencies to avoid overexposure to any single asset.
Use of Stop-Loss Orders:
- Implement stop-loss orders to automatically sell assets at a predetermined price, limiting potential losses during sudden market downturns.
- Regularly review and adjust these orders based on market performance and volatility.
HODL – Long-Term Perspective:
- Understand that high volatility is a characteristic of the crypto market and can lead to significant gains and losses.
- Focus on long-term investment goals rather than short-term market fluctuations. As cryptocurrency (and bitcoin, in particular) matures as an asset class, it may become more resilient to regional conflicts.
Risk Capital Allocation:
- The timeless advice “Never risk more than you can afford to lose” is especially relevant for high-risk assets like cryptocurrencies.
- Keep a portion of your portfolio in more stable investments as a safeguard.
Leveraging Technology for Management:
- Utilize financial tools and platforms like ZenLedger to track and manage crypto investments efficiently.
- Employ portfolio management software to maintain a clear asset distribution and performance overview.
Understanding and Compliance with Regulations:
Stay updated on regulatory changes in the crypto space to avoid legal pitfalls.
Ensure compliance with tax laws and regulations related to cryptocurrency investments.
Continuous Learning and Adaptation:
- Educate yourself about market trends, cryptocurrency technology, and investment strategies.
- Be open to adapting your strategies as the market evolves.
Implementing a mix of these strategies can help mitigate the risks associated with the impact of global events on cryptocurrency valuations, leading to a more resilient investment portfolio.
As cryptocurrency’s role in the broader financial landscape grows, understanding its sensitivity to global events becomes essential. While disruptive events pose risks, they also present opportunities for savvy investors.
How do you stay on top of the impact of global events on cryptocurrency valuations? No matter what your strategy, one thing is for sure: crypto investing requires meticulous record-keeping for tax time. ZenLedger can help you quickly calculate crypto taxes and find opportunities to save money and trade smarter. Get started for free now, or learn more about our professionally prepared plans!
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.