Price swing in cryptocurrency is mainly caused by increased volatility and can be easily seen when the price of certain coins undergo a rapid, directional change in value. Crypto Investors refer to these sharp shifts in price as cryptocurrency price swings.
Cryptocurrency prices can swing crazily even within a single day. For example, in April 2021, the price of bitcoin rose to almost $64,000 as enthusiasm surrounding the crypto market swelled. Coinbase, the largest cryptocurrency exchange platform, just announced in a press release that it will begin the public trading of its stock and was set to go public in just three days. Tesla also announced that they would start accepting bitcoin as a form of payment for its vehicles. A month and a half later, bitcoin was trading below $40,000 as Tesla is no longer accepting bitcoin, and Coinbase stock is down to roughly 30% from its all-time highs (ATH).
For newbies in the Crypto world, this kind of swing in price can be disturbing, but for experts, it's an opportunity to even use it to one’s advantage.
In this article, we'll explain the strategies to apply to ensure you use price swings to your ultimate advantage. First of all, let’s talk about what causes price swings so you can know what exactly to look out for in developing strategies that work for each situation.
What Makes Cryptocurrency Price Go Up or Down?
There are varieties of factors that cause cryptocurrency price swings and all of these factors work together to create price volatility. Understanding these factors can help you to decide whether to invest in a particular coin, trade it, or just step back on a such coin.
Cryptocurrencies are generally decentralized and they derive their price swings (also known as price volatility) are caused by factors, including:
- Supply and demand
- Cost of production
- Availability on exchange platforms
- Government regulations
- Investors media hype
Supply and Demand
Supply and demand affect the prices of most commodities more than any other factor. A basic rule in economics is that the price of assets, commodities, products, or services, depends largely on supply and demand. There are 4 major rules in supply and demand:
- If supply increases but demand remains constant, the price will fall
- If supply falls but demand remains constant, the price will rise
- If supply remains constant while demand rises, the price will rise
- If supply remains constant while demand falls, the price will fall
For instance, if there's a drought, the supply of farm produce reduces, and the demand increases, hence, causing an increase in price. The same supply and demand principle works for cryptocurrencies. A cryptocurrency's supply is always known and has a predetermined maximum supply. While some other coins have no production limit. Existing tokens are "burned" in some cryptocurrencies to keep the circulating supply from growing too high and delaying inflation. Burning a token involves sending it to an unrecoverable blockchain address.
Each cryptocurrency has its own monetary policy. Each new block mined on the network adds a predetermined amount to the coin’s supply. For example, Ethereum pays a fixed reward per block mined, but it also compensates for inserting "uncle blocks" in fresh blocks, which improves its blockchain's efficiency. As a result, the supply growth isn't as predictable. Some cryptocurrency supplies are wholly determined by the project's management team, which can choose to issue more tokens to the public or burn tokens to control the supply.
Demand can increase as a project gains popularity or as its use case increases. The demand for a cryptocurrency increases as it becomes more widely accepted as an investment, therefore, limiting the circulating supply. An example is when institutional investors began buying and holding Bitcoin in early 2021, the price skyrocketed as demand outpaced the rate at which new coins were generated, essentially reducing the total possible supply of Bitcoin.
Cost of Production
Mining is the process by which new cryptocurrency tokens are created. Using a computer to validate the next block on the blockchain is known as bitcoin mining. Cryptocurrency's ability to function is due to the decentralized network of miners. In exchange, the protocol generates a reward in the form of cryptocurrency tokens, plus any fees paid to the miners by the exchanging parties.
Computing power is required to verify the blockchain transactions. This is done by investing in pricey equipment and electricity and solving difficult mathematical puzzles. For example, in Bitcoin mining, the miners verify legitimate transactions and create new Bitcoin as a reward for their work. A transaction is considered verified once the miner solves a cryptographic (mathematical) problem. The more competition there is for mining a cryptocurrency in a proof-of-work system, the more difficult it is to mine. As a result, the cost of mining rises as more powerful equipment is required to solve the questions and mine effectively.
As mining expenses rise, the value of the cryptocurrency rises as well. Miners will not mine if the value of the coin they are mining is insufficient to cover their costs. And because miners are required to make the blockchain work, the price will have to rise as long as there is a demand for it.
Availability on Exchange Platforms
Bitcoin and Ether, two popular cryptocurrencies, are traded on a variety of crypto exchange platforms. The most popular tokens are listed on almost every cryptocurrency market.
However, some smaller coins may only be accessible on a few exchanges, restricting the number of investors that may participate in such coins. Some wallet providers will gather quotes from many exchanges for any set of cryptocurrencies, but they will charge a fee for doing so, raising the cost of investing. Also, if a cryptocurrency is thinly traded on a tiny exchange, the spread taken by the exchange may be too wide for some investors.
More exchanges listing a cryptocurrency can increase the number of investors ready and able to acquire it, hence increasing such a coin demand. And, everything else being equal, when demand grows, so does the price.
There are over 10,000 cryptocurrencies in existence as of February 2022 and new crypto projects and tokens are launched on a daily basis. New competitors face a low barrier to entry, but producing a sustainable cryptocurrency also necessitates the development of a network of cryptocurrency users.
A useful blockchain application can quickly grow a network, especially if it addresses a flaw in a rival service and has more reasonable useability. If a new competitor develops traction, it depletes the value of the incumbent, causing the incumbent's price to fall as the new competitor's token's price rises.
Investors Media Hype
Another important aspect influencing the volatility of the crypto market is the investor media hype. The hurdles to entry in crypto are substantially lower than in more traditional businesses (such as franchising or real estate). There is no requirement for lawyers, trading licenses, or a minimum investment amount. In this way, anyone with internet access may jump right in and start trading.
However, as more retail investors join the fray, the more the market becomes confusing for investors. This is one of the reasons why cryptocurrency markets may be extremely volatile during periods of media hype caused by investors with massive influence - like Elon Musk. This causes panic or FUD (Fear, Uncertainty, and Doubt) and makes the experienced investors keep their cool while beginners panic and want to sell – and it also means that crypto markets are more susceptible to disinformation manipulation.
Now, let’s dive into how you can make money in swing trading.
How Can You Make Money in Swing Trading?
Swing traders utilize a variety of strategies to capture a coin’s price swing that can last anywhere from a few hours, days to many weeks. They frequently employ technical and fundamental analysis in the development of trading strategies.
Technical analysis examines past market data for assets such as cryptocurrencies. The price and volume of a cryptocurrency are included in this market statistics. Traders and investors can predict future market behavior by looking at recent market trends and patterns.
Fundamental analysis examines qualitative and quantitative criteria such as market capitalization and other economic indicators to determine a crypto’s fair market or real value. Fundamental analysis is used to assess whether a coin’s price is overvalued or undervalued, as opposed to technical analysis, which is commonly used to predict crypto price fluctuations.
Surprisingly, some, if not the majority, swing traders don't construct trading strategies based solely on one technique. They frequently combine the two in order to find profitable trading chances. This helps them to capture significant price swings and avoid downtime.
The Parameters to Consider for Swing Trading: Tips to Get You Started
Swing trading is a nice method to get started with trading. If you're new to swing trading, here are some tips to help you get started.
1. Find the right cryptocurrency to trade
According to Coin Market Cap, there are already over 10,000 cryptocurrencies on the market. This implies you'll be able to choose from thousands of coins to trade. But how can you pick the right currency for your trading requirements?
The best options in swing trading are cryptocurrencies with the highest market capitalization. Bitcoin (BTC) and Ethereum (ETH), for example, are among the most commonly traded coins on cryptocurrency exchanges, and their market cap is one of the ultimate reasons they are being traded.
Swing traders see these coins swinging extremely high or low in volatile marketplaces. They profit from these volatile cryptocurrencies by investing for a few days or weeks on one side of the trade and then switching to the other when the price swings in the opposite direction.
2. Find a secure and reliable cryptocurrency exchange
Choose a secure and reliable online exchange or marketplace after carefully deciding which cryptocurrency to trade. It's a good idea to look at its security features, the number of users, trade volume, transaction fees or other costs, and other important information. This might assist you in determining whether or not a platform is appropriate for your trading needs.
3. Stay up to date on cryptocurrency news and trade trends
Cryptocurrencies and trading strategies, like any other innovation and company plan, are always developing. As a result, it's critical to stay connected and informed about the latest crypto trends and developments.
4. Select an appropriate time to trade
Because cryptocurrencies' prices fluctuate so much, it's critical to be cautious when deciding whether to trade. It's not always easy to foresee the next prospective changes in crypto markets due to their volatility. Although the price of a cryptocurrency may be rising right now, no one can predict if the trend will continue in the coming hours, days, weeks, or even months. Swing traders might use this "waiting period" to take advantage of more opportunities for short or long-term up or down moves.
It’s all about continuous learning
In conclusion, swing trading, as previously said, is an excellent way for crypto traders to get their feet wet. However, remember, learning is a never-ending process. And this will eventually help you improve your crypto trading skills in the future.