Cryptocurrencies had one of the toughest years since their launch in 2022, with prices plummeting to very low levels seemingly overnight. And while 2023 has offered a respite from this downward tendency, the market has not yet recuperated 100%. Binance, the largest cryptocurrency exchange in the world, has observed that investors are looking to buy Ethereum again. Yet, the ecosystem remains subjected to fluctuations, and many are still adjusting their strategies to determine the best thing to do in this situation.
Several different things impact the overall price of cryptocurrencies. While all of them record some price volatility, the ones that are more established on the market tend to have better liquidity and be overall safer assets. However, traders must also be mindful of them and avoid the trap of falling for the hype and entering the crypto environment completely unprepared.
Spike in interest rates
As cryptocurrencies entered mainstream finance, they also started to be impacted more deeply by price fluctuations occurring in traditional markets. The world has been dealing with high inflation levels, and while experts believe the upwards trend will let up sometime during 2023, it remains to be seen exactly when this will occur. Economists have claimed that although inflation will eventually fall into standard markers, the process until that time is likely to be slower and more challenging than previously believed.
On May 3rd, the Federal Reserve announced that it will raise interest rates, yet again, by 25 basis points. This is just the latest of a series of ten consecutive hikes that began in March 2022. Although inflation has declined slightly compared to last year, the inflationary pressure continues to be elevated, causing prices to be much higher across all industries. The process of bringing it down to the annual 2% value is still far away.
And it’s not just traditional markets that bear the brunt of the economic uncertainty. The digital asset ecosystem feels the effects as well. Like Bitcoin, Ethereum lost some of its hard-earned value again, with prices going momentarily flat. So far, ETH has recorded gains of approximately 50% since the beginning of 2023, partly because the market expects interest rates to pause this year.
Because the official monetary policy continues to be difficult to predict until inflation is controlled, many investors avoid asset classes that they perceive to be riskier. Among them, cryptocurrencies are, unfortunately, one of the most visible. However, the fact that digital money is regarded from a stereotypical perspective or painted with a broad brush is nothing new. Many possible investors are likely to develop a more favorable opinion after becoming convinced of crypto’s potential.
Whale activity
In crypto trading, whales are the investors that buy or hold large amounts of coins, often amounting to hundreds of thousands or even millions of dollars. Their large transaction orders typically impact the overall market and can lead to considerable price fluctuations. Therefore, it is no surprise that any time whale activity is recorded on the blockchain, it makes the news.
Generally, their impact isn’t associated with positive or helpful price movements. Typically, when a massive sell order commences, it causes a sudden price drop, while buying results in a sudden price spike. In a sense, whale transactions can be associated with artificial price changes, and regular investors must be particularly mindful of these massive movements to protect themselves.
On May 4th, exchanges became aware of the movements of a giant crypto whale earlier the same week. The unknown investor moved almost $505 million in ETH, which, according to research, is one of the largest transfers from self-custody to an exchange over the past five years. During the same week, a different wallet performed six transfers worth roughly 80,000 ETH, approximately $150 million.
Possible decline
Since the market is still recovering, traders and analysts are carefully observing all the price movements and changes in the crypto environment. And while values started off strong at the beginning of the year, things changed over time. Several events caused the prices to stagnate, most of them directly associated with the stricter regulations and the crackdowns on exchanges and crypto-friendly banks that uncovered improper practices.
In the case of Ethereum, many investors believe that the market is experiencing an overheating episode. The reason is that the cumulated number of transactions is now higher. This also causes the gas fees on the network to become more expensive due to the amount of computing power necessary to perform so many transfers at the same time. Much like in the case of the crypto price, when the demand is higher, gas fees also become more elevated in order to keep up.
During times when gas prices become elevated, transfers can fail if the fee price point is lower than what the network demands at the time. Transactional failure is a clear indicator that the market is navigating a challenging period. Recently, the count broke the 200,000 mark, and the market started showing signs of obvious overheating. From here on, the price could go in either of two directions, either increase or decrease. Either way, there’s a high possibility for volatility, so you need to make sure your trading strategy can handle all the possible changes.
Over the past few days, the transaction count indicator has become higher yet again, showing that activity levels on the blockchain are elevated at the moment.
Stablecoins
A stablecoin has recently gone live on the Ethereum blockchain. The process is not yet finalized, as the user interface still needs to be deployed, but investors are excited about this development. The stablecoin was announced last summer and has been highly anticipated ever since. The stablecoin is collateralized and backed by several digital assets, including Ethereum, as well as liquidity provision tokens. According to research, the contract currently holds nearly $2 million in collaterals.
The cryptocurrency market is constantly changing and developing. As the prices continue to shift, investors must ensure they remain in control of their portfolios to avoid any financial damage and losses.
