How the cryptocurrency market works and what you should really know

What the cryptocurrency market is

Cryptocurrency is a form of digital currency that enables direct online transactions between individuals without the need for intermediaries. It also provides an alternative way to store and exchange money digitally. Cryptocurrencies can be used to buy goods and services online. Some companies have issued their own cryptocurrencies, which may be traded specifically for the goods and services those companies provide. One bank explainer compared cryptocurrency with casino chips or arcade tokens exchanged for real money. When you look at the crypto currency market , you're looking at a system that tries to remove the middleman from financial transactions.

How blockchain works

The U.S. Government Accountability Office describes cryptocurrency as a digital representation of value that uses blockchain technology to function as money or an investment. Blockchain is not itself a new technology; it is an innovative use of existing, mature technologies. Its core function is to maintain a tamper-resistant ledger for digital assets such as cryptocurrency. There are two broad blockchain implementation models. Public blockchains, sometimes called "permissionless" systems, can be used by cryptocurrencies such as Bitcoin, and anyone can add to the chain. Private blockchains, also called "permissioned" systems, are generally used by institutions such as companies or government agencies, and participation in a private network is restricted. The bit coin stock market runs on a public blockchain, which is part of what makes it different from traditional securities.

Blockchain can support a wider set of economic activities than direct cryptocurrency transfers. Its features may reduce the need for some intermediaries, create trusted records of transactions, expand access to financial products, and support new forms of property rights, privacy, and economic organization. Distributed-ledger systems are also associated with concepts such as hash functions, staking, proof-of-work, smart contracts, zero-knowledge proofs, decentralized autonomous organizations, Web3, and digital scarcity.

Market size and growth

A globalEDGE overview by Kaleb Davis described the digital currency market as having undergone major expansion since its previous examination. The overview said technological advancement, including developments in artificial intelligence, made further cryptocurrency expansion and evolution likely. Bitcoin was described as the world's leading digital currency. The globalEDGE overview reported that more than 11,000 new types of digital currencies had entered the market since 2020. After excluding currencies described as dead, the total was said to fall to 8,985. A Citizens First Bank explainer gave a different figure, stating that there were more than 6,700 types of cryptocurrency. The sources do not provide a common counting method, and the totals differ in date, scope, or both. So take any single number with a grain of salt.

Market scale facts

Bitcoin's price cycles

Bitcoin market cycles are periodic changes in value characterized by periods of growth, generally described as bull markets, and periods of decline, described as bear markets. Bitcoin's cycles are influenced by technological, economic, regulatory, and psychological factors. After significant rises, corrections have often followed, but the timing and size of these changes remain uncertain.

Bitcoin price history

Bitcoin halving events occur roughly every four years. A halving reduces the block reward paid to miners by half, reducing the rate at which new Bitcoin is introduced. The source states that historical halvings have often been followed by substantial price increases.

What drives Bitcoin's price

Blockchain technology developments can influence Bitcoin's price. Protocol upgrades may improve security or scalability and affect investor confidence. SegWit and the Lightning Network are identified as pivotal developments in this category. Public and media sentiment can produce large price movements. Positive coverage may lead to buying activity, while negative news can contribute to panic selling. Regulatory announcements concerning Bitcoin's legal status or possible restrictions can also cause significant price changes.

Macroeconomic conditions, including inflation, interest rates, monetary policy, and overall financial stability, can make Bitcoin more or less attractive as an alternative asset. Bitcoin's monetary-policy sensitivity has also been affected by the broader debate over whether it should be treated as a hedge against currency debasement. Institutional adoption can affect demand. Investment and interest from large financial institutions may increase Bitcoin's visibility and support prices, while custody restrictions, enforcement actions, or negative decisions by institutions can weaken sentiment.

Research on cryptocurrency returns

A December 15, 2021 article by Simon Business School Dean Sevin Yeltekin summarized research by assistant professor of finance Yukun Liu. Liu and his co-authors examined common factors that influence returns on stocks, precious metals, currencies, and other asset classes. Their analysis considered possible cryptocurrency predictors such as mining costs, volatility, and price-to-dividend ratios. They found that almost none of these traditional asset-pricing factors had a meaningful relationship with cryptocurrency returns.

The finding does not mean that cryptocurrency returns cannot be analyzed. It means that conventional narratives and models designed for stocks, currencies, or other established asset classes did not explain cryptocurrency in the same way. Liu described cryptocurrency as operating in a category of its own. Momentum refers to the tendency for an asset that has risen in value to continue rising for a period. Liu's research found evidence of a momentum effect in cryptocurrency. One result summarized in the article suggested that investors may have a basis for considering buying Bitcoin when its value has increased by more than 20% over the previous week.

Investor attention effects

Liu's research indicated that the probability of a cryptocurrency such as Bitcoin falling to zero and collapsing overnight was estimated at 0.3% based on historical performance. The same research gave the following probabilities for other assets: Euro: 0.0009%, Australian dollar: 0.003%, Canadian dollar: 0.005%.

Investor psychology and risk

The psychological forces affecting cryptocurrency markets include fear of missing out, enthusiasm, and overconfidence. During bull markets, fear of missing out can draw participants into an asset after prices have already risen, potentially increasing the pace of the increase. During bear markets, fear and doubt can contribute to broad sell-offs. The overall mood of investors may be monitored as part of attempts to anticipate market behavior, but it does not eliminate uncertainty.

If you're asking yourself is crypto a good investment , the honest answer is that it depends on your risk tolerance and financial goals. Cryptocurrency values have experienced extreme increases and decreases, and some professional investors view crypto trading as similar to gambling because its value does not follow a reliably predictable pattern. The source contrasts cryptocurrency with stocks, mutual funds, and other traditional investments. It states that investors cannot reliably predict cryptocurrency price changes or calculate returns in the same way they can for many conventional assets. It advises prospective investors to conduct research and consider timing rather than entering solely because of excitement or recent price increases.

Cyberattacks and security risks

A May 16, 2023 report by Aleksander W. Jarosz examined cybertheft targeting cryptocurrency and DeFi systems. Its scope was limited to attacks resulting in at least $1 million in losses. The report predicted that cryptocurrency adoption would continue despite the 2022 market downturn. It estimated total cryptocurrency losses at approximately $3.8 billion in 2022, an increase over the previous year. Early 2023 attack losses were already tracking at approximately 25% of the 2022 total. The report described this rate of growth as unsustainable.

The analysis also noted that cyberattack growth was occurring for the first time alongside a large decline in the market capitalization of almost all cryptocurrencies. It predicted that end users and organizations connecting to cryptocurrency systems would face increased risk over the following two years as blockchain financial technology matured.

Attack patterns and trends

The report described threat actors as having well-established experience against cryptocurrency platforms. It also stated that smaller thefts were likely to follow the same pattern as large attacks, increasing overall risk.

The report recommended independent code review and testing for smart contracts. It stated that testing should be transparent to end users, recognizable as an independent review process, and based on minimum standards and accreditation. Signing keys control access to cryptocurrency wallets, and the report stated that wallet keys should be stored offline or in an air-gapped environment. The most common user-focused attacks included phishing, malicious decentralized-application downloads, compromise of personal wallet systems, and inadequate signing-key controls.

The report cited the Ronin Bridge attack as a central example of how compromising privileged signing keys can have an outsized effect because those keys may provide access to large amounts of assets.

Criminal use and traceability

The materials present different descriptions of cryptocurrency's relationship with crime, regulation, taxation, and traceability. One source cited an estimate that only 0.3% of cryptocurrency transactions were thought to involve criminality. That figure concerns criminal use of cryptocurrency and is distinct from the separate estimate discussed later regarding the probability of a cryptocurrency market collapse.

Several forms of criminal or deceptive activity are repeatedly identified: scams and Ponzi schemes, exaggerated claims about the future price of a cryptocurrency, malicious social