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How is the influx of new investors impacting the price of Bitcoin?

After the Bitcoin course has shown an extremely strong rally over the last few weeks, this might be over for the time being. Nevertheless, Bitcoin managed to free itself from the clutches of a downward trend and recaptured the 10000 marks. In fact, the pair reached a high of $10300 today. Then the unexpected happened: the Bitcoin price crashed by $700 within 20 minutes.

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This picture show a crypto coin.

According to the Google-trends service, since the beginning of the year, cryptocurrency has began to gather more interest from investors. This may have a positive impact on the cost of BTC in the short term, but in the long term could lead to a sharp decline in price as novice investors make poorly informed choices.

Since the beginning of the year, the number of Bitcoin search queries has increased by almost 50%, according to the Google trends service. The situation with other top coins is similar. For example, altcoins Tron and Ethereum for the same period became more than 60% more popular.

Born2Invest is a mobile application for crypto enthusiasts and finance news. It includes news and an article aggregator, a convenient service for monitoring the crypto market. Updated throughout the day, Born2Invest is a professionally curated digest of business and finance news from the most trusted sources.

New investors inflow

It probably speaks about the inflow of new investors in the market. Their interest in digital money may have been triggered by the fact that Bitcoin has risen more than 40% since January, and the price of some altcoins from the top 10 by capitalization has risen 100%.

The spike in Bitcoin search queries was in the fall of 2017 when the coin set its historical high, and last spring, when the asset price rose from $3200 to $14000 within a few months. In the short term, increased interest in Bitcoin is likely to have a positive impact on its price. The inflow of new investors to the market and, consequently, the money may trigger the coin price rise, which in turn will attract more buyers.

However, in the long term, a sharp increase in demand, may lead to the collapse of the coin price. Firstly, due to the lack of liquidity. Since the beginning of the year, the capitalization of the cryptocurrency market has increased by about 50%, from $190 billion to $286 billion. This means that now in order to buy all digital assets at the current price, it is necessary to have $286 billion in the accounts of traders and investors, as well as the desire to spend it on the purchase of coins.

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Rise in market capitalization

In the case of a sharp rise in market capitalization, the buyer may not have enough money to contain the seller’s pressure and the price of cryptocurrency from falling. In addition, there may be a situation in low-liquid stock exchanges. For example, on February 10th, the price of Binance Dex fell to $1000 on the decentralized Binance Dex market due to a lack of funds in glasses to buy Bitcoin.

Last week, something similar happened at Binance. In seven days Bitcoin paired with USDS steal coin has fallen by 5-10% below market level seven times. At the same time, the price of XRP token on the Bitmex platform fell to $ 0.13, when in fact it was worth $ 0.33. This confirms the idea that the problem with the lack of liquidity is already evident.

Bitcoin value

Secondly, the value of the first cryptocurrency may collapse due to a sharp increase in the supply of the coin, which used to be a long-term investment. The graphs show that the peak of “Bitcoin” searches almost coincides with the historical maximum of its price. Consequently, the majority of investors who came to the crypto market during the hike bought digital assets at a rate close to the highest values, and now suffer losses.

This assumption is confirmed by the Intotheblock analytical service. According to its data, 20% of investors bought Bitcoin for more than $9650. At the same time, about 30% of holders of the first cryptocurrency invested in it in the price range from $6000 to $9350.

The coin offers may at some point become much bigger if Bitcoin goes up even higher. Many investors are waiting for the cryptocurrency to rise in order to get rid of it. This conclusion was made by the experts of Arcane Research, referring to the research of the analytical service Glass node. According to his data, asset holders transfer a small part of their funds to stock exchanges, while keeping the rest on cold wallets.

Accordingly, as Bitcoin approaches the historic high, it will grow:

  • The number of coin holders who have bought a coin below the current price and want to fix a profit or break even after years of “holding”;
  • The amount of money needed to contain the seller’s pressure.
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Once the sharp inflow of new investors is over, there is likely to be a significant gap between the capitalization of the cryptocurrency market and the amount of free money. In other words, supply will exceed demand, so the seller will not be able to find his buyer. In December 2017, this led to Bitcoin price entering a long-term decline phase, which lasted about a year and a half.

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(Featured image by Aleksi Räisä via Unsplash)

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First published in РБК, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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Daphne Freeman has worked in the crowdfunding and impact investing industry for the past few years, gaining experience in marketing, and connecting businesses and entrepreneurs in need with the right investors. As a seasoned grant writer as well as financial market journalist, she is passionate about making a social impact in the world. A free spirit, Daphne also enjoys writing and exploring topics of interest, currently CBD, health and beauty, and social media influencers.