From Bitcoin to Altcoins: Uncovering the Truth About Price Volatility!

Words: ggrow

Compilation: Vernacular blockchain

When discussing cryptocurrencies, people tend to focus more on the price spikes and crashes than on the underlying technology. While I don't want to focus solely on price fluctuations, as a cautionary point, it is still necessary to explore this topic and analyze the reasons behind price fluctuations. The following is the main text:

01 Valuation of cryptocurrencies

The valuation process for cryptocurrencies like Bitcoin, similar to commodities like gold or silver, is very complex. Factors such as scarcity, circulation, supply and demand are crucial. In addition, unique factors such as adoption rates, regulatory policies, and user base can also affect the value of Bitcoin and other cryptocurrencies.

1. Scarcity

Bitcoin's total supply is limited to 21 million, which makes it similar to the precious metal, where scarcity is a key factor in valuation.

2. Circulation

At the time of writing, about 19.9 million of the 21 million bitcoins have been mined. The rest of the bitcoin will be released gradually through mining, a process that is affected by hash rate and the halving cycle. The halving, which occurs approximately every four years, reduces miners' rewards, making it increasingly expensive and difficult to generate new bitcoins.

Halving vs. cost

After the halving, the cost of mining rises because more computing resources are required. As a result, the Bitcoin price is partially affected by hardware and energy costs. Tools like the Bitcoin Rainbow Chart can help visualize historical price trends and provide insights into future price movements based on the halving cycle.

The cost of mining one bitcoin can be very high, with the cost of electricity ranging from $1,324 to $321112 depending on the price of electricity from country to country. In addition, winning the Bitcoin mining "lottery" requires a significant investment in powerful hardware and at least 1% of the total mining power. The "lottery" here refers to the randomness and competition of successfully mining a block.

Bitcoin Rainbow Chart

3. Supply and demand

Bitcoin's supply has decreased over time, not only because its issuance is limited to 21 million, but also because an estimated 3-4 million bitcoins are permanently lost due to private keys being forgotten or inaccessible. Buying cryptocurrency is essentially acquiring a unit of value that can be exchanged for fiat currency, goods, or services.

The smallest unit of Bitcoin is called "Satoshi" (satoshi), 1 Satoshi is equal to 0.00000001 BTC.

02 Altcoins (Altcoins)

Altcoin (Altcoins) includes more than 10,000 tokens, covering stablecoins, platform/network coins, utility tokens, and meme coins. Here I will focus on platform/network coins and utility tokens.

Platform / Netcoin

For a network like Ethereum, its valuation depends on the following factors:

Number of users

Daily trading volume

Transaction speed

Scalability

Take advantage of the network's application (dApps)

Ethereum is just one of many networks. While competitors claim to be faster or more scalable, only time will tell which networks will survive in the long term. Buying Ethereum means acquiring a digital asset that enables you to participate in its blockchain, including the use of smart contracts – a self-executing protocol written directly into code.

TOKEN

Blockchain startups typically raise capital by issuing tokens on platforms such as Ethereum. The value of these tokens is sometimes easier to estimate because they may resemble internet services. For example, Ripple (XRP) offers services similar to PayPal, enabling fast, low-cost cross-border transactions.

Market capitalization( market capitalization ) reflects the market's perceived value of a company or asset. This allows us to compare non-cryptocurrency companies with blockchain companies that offer similar services. For tokens, market cap refers to the total value of a particular cryptocurrency, calculated by multiplying the current price of an individual token by the total circulating supply.

As of the end of 2024, Ripple (XRP) has a market cap of around $130 billion, while PayPal has a market cap of around $90 billion.

While a 1:1 comparison between a non-crypto company and a blockchain company may not be entirely accurate, it can give a rough indication of whether the price matches the services it provides.

On December 24, 2024, CoinMarketCap summarized the market for XRP( Ripple )

03 Sentiment & Market Indicators

Extreme price volatility in cryptocurrencies is driven by factors such as market cycles, sentiment, and FOMO( fear of missing out on ).

FOMO & Rug Pull

FOMO usually starts with the hype about a certain cryptocurrency on social media. People buy to push up the price and then sell when others follow suit ( i.e. "rug pull" ). This process is called "pump-and-dump"(pump-and-dump).

Pump and Dump

Pump-and-dump shipments are common in very low-priced tokens, which often carry many zeros. For example, if the price of a token rises from 0.000001 to 0.000002, it may seem like a small increase, but it is actually a 100% increase. However, if you buy at 0.000002 and the price falls back to 0.000001, you will lose half of your investment. Such drastic price swings can be misleading, especially in a token with such a small trading unit.

Market cycles

Like stocks, mortgages, cars, and luxury goods, cryptocurrencies have cycles. However, due to its nature as an emerging technology, its cyclical fluctuations tend to be more extreme. FOMO could significantly amplify price increases. It's hard to tell where we are in a market cycle, and even a repetition of an earlier cycle doesn't mean that the peak will necessarily be higher than the previous one.

In the case of Bitcoin, it can be argued that halving ( reduces new supply and raises mining costs ) plays a role in future price increases. However, for Token( pre-mined ) with a fixed circulation, the halving effect does not apply. In the long run, it makes more sense to assign value to tokens based on the services they provide, rather than relying solely on speculative price fluctuations.

Market sentiment ( Crypto Fear & Greed Index )

The index measures market sentiment through data such as volatility, trading volume, and social media activity:

Extreme Fear (0-24): Panic selling, probably close to the bottom of the price

Fear (25-49): Cautious market sentiment

Neutral (50-74): Balanced market

Greed (75-100): Strong bullish sentiment and FOMO

Crypto Fear & Greed Index

Altcoin Season (Altcoin Season)

Altcoins usually follow Bitcoin's market cycle, but with some delays. During the "altcoin season", investors' attention shifted from Bitcoin to altcoins, driving their prices higher.

Crypto Winter (Cryptowinter)

A crypto winter refers to a prolonged period of depressed cryptocurrency prices, usually fluctuating in a small range. This does not mean that there are no new developments or news, but rather reflects a period of market stagnation, depressed prices, and generally cautious investor sentiment. Despite the calm market, innovation and progress continue behind the scenes, with new projects and advancements still happening.

04 Conclusion

Cryptocurrencies are essentially software and networks of users, similar to the internet or banks. Bitcoin alone has more than 80 million users. Understanding technical and market factors can help make informed decisions in this volatile market.