A Paper by Uniswap, circle, and Copenhagen Business School addresses this core mystery in the crypto world, exploring the key factors driving the prices of crypto assets (specifically Bitcoin) and breaking down price fluctuations into four types of shocks: conventional monetary policy, conventional risk premium, crypto adoption, and crypto risk premium.
Which factors are the most impactful? - Crypto Adoption Shocks and Crypto Risk Premium Shocks
1. Crypto Adoption Shocks
Crypto adoption shocks reflect the market’s acceptance of cryptocurrencies, tech innovations, and regulatory changes. When new users, investors, or institutions enter the crypto market, the increased adoption drives up cryptocurrency prices.
One event highlighted is the launch of BlackRock’s ETF, representing mainstream financial institutions’ recognition and adoption of cryptocurrencies. This boost in market confidence led to a significant rise in Bitcoin prices.
2. Crypto Risk Premium Shocks
Crypto risk premium shocks reflect the compensation investors demand for holding crypto assets, typically influenced by market volatility, liquidity, and investor sentiment. When crypto risk premiums increase, investors require higher returns to compensate for the risks of holding these volatile assets, usually causing Bitcoin prices to fall, while safe-haven assets like stablecoins see their market caps increase, and vice versa.
During the collapse of FTX, investor confidence in cryptocurrencies plummeted, leading to a rise in risk premiums. This period saw crypto risk premium shocks pushing down Bitcoin prices, while stablecoins’ market cap rose due to their safe-haven status.
Overall, crypto adoption shocks and crypto risk premium shocks dominate Bitcoin’s daily price fluctuations. These shocks not only drive the rise and fall of crypto asset prices but also impact the broader crypto ecosystem through changes in stablecoin flows and market demand. In contrast, traditional market shocks (like monetary policy and traditional risk premiums) play a role during specific periods but are not the primary drivers of high-frequency daily price movements.
So, everyone, actively spreading the word and encouraging those around you to join the crypto world is the best support for your investment returns.
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