What Causes Bitcoin’s Price Actions?

Bitcoin, the pioneering cryptocurrency, has become synonymous with dramatic price swings that can evoke a mix of anxiety and excitement among investors. These price actions are not random; they are deeply influenced by a complex web of factors ranging from immediate market reactions to broader economic trends.

Source: Refinitiv Datastream, Reuters

Understanding the underlying causes of Bitcoin’s price fluctuations is essential for navigating its volatile landscape, whether you’re a seasoned trader or a long-term holder.

This article delves into the key factors that drive Bitcoin’s price actions, exploring the interplay between short-term events and long-term trends, and offering insights on how to respond to this ever-evolving market.

What is behind those sudden, long red / green candles?

Be in crypto long enough and you will inevitably come across one of these long candles that will either make your stomach churn with dread or joy. Indeed, Bitcoin’s price can experience sudden, dramatic shifts on an hourly or even daily timeframe in response to specific events or news, for example:

• June 2011: Mt Gox, the biggest Bitcoin exchange in the world at the time, announced that it had been hacked. In a single day, the value of a Bitcoin fell by over 95%.
• December 2013: When China banned Bitcoin at the end of 2013, Bitcoin lost 50% of its value overnight.
• March 2020: When Covid hit, the markets crashed, and Bitcoin crashed even harder, losing 50% in just 2 days, falling from more than $10,000 in February to below $4,000 in March.
• Mar 2021: The Ukraine-Russia war, for instance, led to a spike in Bitcoin’s price as people in affected regions sought alternative stores of value.
• Sep 2024: BTC tumbled by almost 8% in 24 hours in early Sep 2024 on the back of bleak jobs data, which indicates a weakening economy. This in turn leads to risk aversion among investors as they shy away from risky assets such as BTC. As such, macroeconomic indicators such as employment figures, GDP growth or inflation rates influence investor sentiment towards risk assets like Bitcoin.

At the time of writing this article, the US presidential elections is about 6 days away. You can well expect a huge green candle if a pro-crypto candidate (the one who launched a token) wins, or a huge red candle if an anti-crypto candidate wins.

What is behind bull runs and bear markets?

Over periods of months and maybe even years, however, Bitcoin’s price is influenced more by broader economic factors, primarily the following:

• Global monetary policies: Quantitative easing or tightening by major central banks can impact Bitcoin’s attractiveness as an alternative store of value. This was most obviously seen in the wake of the Covid crisis, as governments printed stimulus checks (aka quantitative easing) prior to the Bitcoin bull rally of 2021, which peaked at $69,000. On the flip side, if there is a quantitative tightening measure being implemented, there will be a reduction in the money supply, leading to contractions in the price of risk assets like crypto and Bitcoin.
• Interest rate changes: When central banks raise interest rates, it can lead to a decrease in Bitcoin’s price as investors move to higher-yielding, lower-risk assets. Conversely, rate cuts can boost Bitcoin as a hedge against potential inflation. For example, with the Sep 2024 announcement of the US Fed rate cuts by 50 basis points, Bitcoin has been on a steady, albeit slow price trajectory upwards.

It is worth mentioning that all these factors apply to the traditional stock and commodities markets as well.

The “In-Between” Phases: Retracement and Consolidation

In addition to the short-term, mid-term, and long-term factors influencing Bitcoin’s price, it’s crucial to understand the “in-between” phases that often occur after significant price movements. These phases, known as retracement and consolidation, play a vital role in Bitcoin’s price dynamics.

Retracement

A retracement is a short-term price movement against the prevailing long-term trend, and typically comes following a sharp price increase–the price pulls back before potentially continuing its upward trend.

Similarly, after a significant price drop, a retracement could involve a temporary price recovery. Traders often use Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%) to predict potential reversal points.

Retracements are often characterized by lower trading volumes compared to the main trend, and are typically short-lived, lasting from a few hours to several days.

Consolidation

Consolidation is a period where the price moves sideways within a limited range, often occurring after a significant price movement. It indicates a balance between buying and selling pressures, and allows the market to absorb recent price changes and often precedes the next significant move.

Consolidation can last from a few days to several weeks or even months. Trading volume often decreases during these periods.

During consolidation, chart patterns like triangles, flags, or pennants may form, which technical analysts use to predict future price movements. The end of a consolidation period is often marked by a breakout, where the price moves decisively above or below the consolidation range.

Understanding retracements and consolidations is crucial for several reasons:

1. Market psychology: These phases reflect shifts in market sentiment and the battle between bulls and bears.
2. Risk management: Traders use these periods to manage their positions, taking profits or cutting losses.
3. Entry points: Investors often view retracements as opportunities to enter the market at a better price.
4. Trend confirmation: Strong trends are often punctuated by retracements and consolidations, which can actually reinforce the overall trend.
5. Volatility indicator: The length and depth of retracements and consolidations can provide insights into market volatility and participant conviction.

By recognizing these “in-between” phases, investors and analysts can gain a more nuanced understanding of Bitcoin’s price movements. While major spikes and crashes grab headlines, it’s often during these retracement and consolidation periods that the groundwork is laid for future price action.

How to navigate these price actions

As mentioned at the beginning of this article, understanding what causes these price actions will help you respond better the next time there’s a crash or a spike. Having said all these, it ultimately depends a lot on your conviction about the asset–whether you’re a trader or a Bitcoin HODLer.

If you believe in the fundamentals of Bitcoin–that because of its qualities of immutability, scarcity and decentralization–it will continue to appreciate in value in the long-term, then you will be more likely to keep your calm and not panic-sell the next time there’s a dip.

Consider, among many others, the following developments that happened in 2024:

• Growing adoption: Acceptance by financial institutions, investment funds, and corporations for treasury reserves or payment systems supports BTC’s long-term price appreciation.
• Use case as P2P money: Bitcoin’s ability to facilitate fast, borderless transactions without intermediaries continues to drive its utility and value.
• Scarcity: The fixed supply cap of 21 million bitcoins, combined with the halving of mining rewards every four years, creates a deflationary pressure that supports long-term price growth.
• Technological infrastructure: The development of layer-2 solutions, improved wallets, and more user-friendly interfaces makes Bitcoin more accessible, potentially driving long-term adoption and price appreciation.

Understanding these multifaceted influences on Bitcoin’s price is crucial for investors, policymakers, and anyone interested in the future of finance. While short-term volatility may grab headlines, it’s the interplay of these various factors across different time horizons that truly shapes Bitcoin’s journey in the global financial landscape.