Cryptocurrency prices are formed from the weighted average of hundreds of different cryptocurrency exchanges. Crypto prices follow each other most of the time. Technical analysis is a decades-old method for predicting market movements, and it also works for predicting cryptocurrency prices. Cryptocurrency prices will likely increase tenfold or a hundredfold during the coming years.
How are cryptocurrency prices formed?
Cryptocurrency prices are formed from the weighted average of hundreds of different cryptocurrency exchanges. Cryptocurrency prices are listed on different sites, and no single and correct price page exists worldwide. In this respect, cryptocurrencies differ from many traditional investments.
Prices in different crypto exchanges are practically very close to each other. The differences are mainly tenths of a percent. How is this possible? If the price of a coin rose significantly on one exchange, investors would start selling cryptos on that exchange with the help of bots and other automated tools. Next, they would buy the same coin cheaper on other exchanges.
This is an arbitrage situation, and arbitrages disappear quickly from efficient markets. That’s why crypto prices are within a fairly small dispersion from each other in different exchanges.
The image below shows the price of Monero (XMR) at a given date. These are the dollar prices for the ten most popular trading pairs. As you can see, the price differences are very small.
Who then decides the crypto prices? How, for example, is the Monero price formed based on different exchanges and trading pairs?
There is no “correct” price for any cryptocurrency. Only prices on different exchanges are used by price aggregate services. These services form a cryptocurrency’s “global price” by using a weighted average of all exchanges where it can be bought and sold. The weighted average means that the exchanges with the largest trading volume have the highest weight.
Different price aggregate sites use a bit different weighting and might also have different sources. This is why every crypto price site shows a slightly different price for any coin at any given moment. The prices you see above are using Coingecko’s feeds.
Bitcoin drives cryptocurrency prices
Crypto prices follow each other most of the time. In addition to this, the entire market is controlled by the largest cryptocurrency, Bitcoin. What is causing this?
The first reason is historical. Bitcoin is the first and oldest cryptocurrency. As late as 2017, giant exchanges like Coinbase only listed a couple of other cryptocurrencies. Altcoins have been serious investments since 2018. “Big money” still flows quite a bit into Ethereum and other altcoins.
Another important thing is liquidity. Big money can’t invest in small cryptocurrencies; it has to start with the biggest one. Bitcoin is like a giant ocean liner turning slowly. When such a colossus starts to move, investors wake up. If the Bitcoin price moves up, all crypto prices begin to move in the same direction.
The reverse phenomenon occurs when prices fall. When investor sentiment changes, the riskiest investments are put up for sale first. Small crypto prices collapse first, and liquidity moves step by step towards the top of the market.
However, recent years have taught crypto investors something new. If anyone still imagined that cryptocurrencies were an asset class detached from the rest of the world, imagine no more. If Bitcoin drives the crypto market, then Bitcoin is driven by global liquidity.
The world’s largest central banks control global liquidity. The so-called loose money policy ends when these institutions tighten monetary policy and raise interest rates. After this, risk-taking decreases, and money flows away from risky investments (crypto) towards safer investments.
Cryptocurrency prices and technical analysis
Technical analysis is a decades-old method for predicting market movements, and it also works for predicting cryptocurrency prices. At first glance, you might think that cryptocurrency prices are too irrational. Even large-scale cryptos can rise or fall by tens of percent per day several times a year. Even a 10-20 percent increase per hour is not an impossible idea.
Can technical analysis be used to predict the direction of crypto prices? Or is the application of this tool completely hopeless?
Technical analysis works well in crypto if you remember certain game rules. Technical analysis is never 100% correct. It provides probabilities for certain scenarios. Many support and resistance levels and trend lines work great for cryptos.
The graphic below shows a good example from 2022. Bitcoin has formed a rising channel, from which the course breaks down often. The price turned lower just at the top of the channel after meeting the 200-day moving average (purple line) and finally broke the bottom, falling more than 60 percent below the April highs. Just as the technical analysis also predicted.
The so-called black swan events sometimes move prices drastically and “break” technical analysis. Good examples are the 2022 Celsius and FTX crashes. Such events are also seen in the stock market, but less often.
The crypto market is much easier to move due to its small size. Because of this, cryptocurrency prices react to certain news more violently than stocks, which can make many doubt the functionality of technical analysis.
However, this does not mean that TA usually does not work well. It offers good tips about where the up or down trend could be expected to turn. The basics of technical analysis are useful for everyone, even if you are not an active day trader.
How high can the crypto prices rise?
Cryptocurrency prices will likely increase tenfold or a hundredfold during the coming years. A small market-cap-cryptocurrency can make such movements in one year or even six months. But is such a rise possible also for the major cryptocurrencies?
The most common mistake is to stare at the price of a cryptocurrency. This sounds illogical, so let’s open up the idea more. It is easier and wiser to evaluate the price potential through market capitalization.
Consider an example where a coin has a price of $1 and the market cap is $1 million. That means there are one million coins in circulation. If the price increased 10-fold, its market cap would be $10 million.
If the price of the example coin rose from $10 -> $20, its market cap would increase by $10 million again. That is, as much as it did when the price moved from $1 -> $10. The bigger the market capitalization rises, the more money is needed for the price to move.
Also, the market cap rises so high at some point that there are limits to realistic growth. If, for example, the price of Dogecoin rose from the current $0.1 -> $5, its market cap would be twice that of Bitcoin. That will never happen.
You can also analyze cryptocurrency prices and their upside potential by looking at cryptos as an asset class. For example, the market cap of gold is around $12,000 billion, and cryptos are currently at one billion.
It is quite realistic that cryptocurrencies would be the size of gold as an asset class. That would mean a 12-fold increase in the whole market. Cryptocurrency prices would then rise 12x from the current level. Sure, some more, some less, but about average.
Remember not to focus so much on the unit price but on the market cap. That way, you get a much better overview of the realistic potential of a coin.
Are you interested in buying cryptocurrencies? In that case, look at this beginner’s guide: How to buy cryptocurrency? It gives you detailed instructions on how to buy cryptos easily and safely.