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May 18, 2021

The DFi Labs Wrap

FACTORS INFLUENCING CRYPTOCURRENCY PRICES: SOCIAL MEDIA, INTEREST RATE, INFLATION...

Tesla CEO Elon Musk tweeted on Wednesday that Tesla has suspended the use of bitcoin to
purchase vehicles, citing concerns about “rapidly increasing fossil fuels for bitcoin mining and
trading”. The move caused the digital currency to plummet, wiping out hundreds of billions of dollars across the cryptocurrency market. In the first few minutes after Musk’s announcement, the price of Bitcoin fell by around 5%, while Ether fell by 1.2%, Ripple by 6.26% and Dogecoin by
9.48%.

Some other previous events illustrate the significant impact Elon Musk’s Twitter activity can have on cryptocurrency markets; such as:

  • Musk’s Twitter bio update to #bitcoin resulted in a significant cumulative abnormal return
    (CAR) of 6.31% after 30 minutes, 13.19% after one hour, and 18.99% after seven hours.
  • Musk’s tweet One word: Doge ended in a significant CAR of 8.17% over five minutes, peaking
    at 17.31% over one hour.

While the bio update on Twitter was meant to be a serious show of support for Bitcoin, Musk later admitted that the tweet about Dogecoin was a joke. The fact that a joke made by the world’s third-richest man has caused such a strong market reaction shows the power of people who have influence in the cryptocurrency market.

One of the main aspects that will determine the future success of cryptocurrencies is whether they can be universally adopted by consumers as a means of exchange and a store of value.
Thus, when a prominent supporter recommends a cryptocurrency to others, it significantly improves the underlying prospects for that currency. As more consumers begin to use it and promote it to others, the chances of its widespread adoption increase and its price is positively
influenced.

If Elon Musk’s Dogecoin hustle is any good, it is sure to attract several serious new players/influencers in the space offering/backing various cryptocurrencies. In terms of price changes and consumer interest following his tweets about Bitcoin and Dogecoin, he’s been successful so far. The positive reaction to the price of Bitcoin after Tesla announced earlier this year that it was buying $1.5 billion in Bitcoin and allowing Bitcoin to be used to purchase its cars in March has fuelled a rally in cryptocurrencies and increased their perceived legitimacy as a form of payment and investment. The price of Bitcoin reacted negatively after Tesla disclosed the sale of some of its Bitcoin holdings during its last earnings release, dropping 17 per cent after Elon Musk’s recent tweet criticising its energy consumption and suspending the use of Bitcoin to purchase vehicles. Similarly, Dogecoin reacted very positively to his recent tweet about working with Dogecoin developers to improve the efficiency of trading on the system.

Cryptocurrencies have long been associated with social media networks. As such,
fluctuations in the cryptocurrency market may be caused by social media and other media, for better or worse. However, the forces that are really driving the price of Bitcoin these days are not as obvious as most. As cryptocurrencies have become more well-known and known to a wider audience, the price dynamics of Bitcoin have been a controversial topic. In fact, given that Bitcoin is recognised as another institutional asset class, its price is even more influenced by global macroeconomic factors. We are talking about inflation, interest rates and economic policies.

Inflation:

Inflation is likely one of the most important factors behind the Bitcoin investment thesis. People are looking for investments that can serve as a hedge to protect themselves from this risk. Hard assets that are limited in supply and retain their value.

Interest Rates:

Interest rates control everything from the balance of payments to investment to money and
lending. Their impact on economic growth and asset prices is particularly important. When it
comes to interest rates, one of the most influential is the rate set by the central bank. When the
Federal Reserve cut interest rates to zero last year, it signalled a loss of opportunity for many
investors to generate income. This led these investors to look for more “risk-oriented” assets to
get the returns they craved. Bitcoin is often seen as a ‘risk-oriented’ asset, so it sometimes
reacts to some interest rate shocks just like stocks do. If the Federal Reserve raises interest
rates, bitcoin prices will fall as investors and traders pull money out of risky investments. The strengthening dollar has historically hurt the price of bitcoin, and an interest rate hike would only help bolster the dollar.

Economic Policy:

Even if policies do not directly affect Bitcoin, those that influence the broader global market can impact the price of Bitcoin. Economic policies can be broken down into two different types, that is.

  • Monetary policy: Those that impact on money supply which is determined by a central
    bank;
  • and fiscal policy which relates to decisions about taxation and spending made by the
    government.

CRYPTO ASSET MARKET PERFORMANCES

When we approach the third week of May 2021, the crypto market has seen another massive sell-off. The entire crypto market has plummeted by 10%, losing $275 billion in just 24 hours. The market appears stressed and under pressure, with a significant sell-off in both Bitcoin (BTC) and the altcoin space. Last week’s instability in the cryptocurrency market persisted throughout the weekend.

BITCOIN

BTC has deviated from a long-term trend that has held for almost six months. The price of Bitcoin has fallen into a bear market following a dramatic change in circumstances. btc is 35% below its all-time peak of around $65,000 on April 14. Its market capitalisation has fallen to US$800 billion.

Bitcoin traded around $44,000 for the first time since February 28, 2021. After Elon Musk announced that Tesla would no longer accept BTC due to environmental reasons, BTC broke its major support of $55,000 and quickly fell by 15%.

The altcoin market is now also seeing a big drop as the decline in bitcoin (BTC) continues to have a snowball effect. A massive $175 billion has been eroded from the altcoin space in the last 24 hours.

ETHEREUM

Ethereum (ETH) has plunged 12.46% taking its weekly losses to 20%. Following a huge surge to an all-time high of $4400 earlier this month, ETH is now trading 23% lower at $3325 with a market value of less than $400 billion.

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