How political events influence crypto prices: Key factors and market reactions
Cryptocurrencies, as decentralized digital assets, often exist outside traditional financial systems, making them seemingly immune to conventional market influences. However, political events have proven to be a significant factor in the volatility of cryptocurrency prices. This article explores how political events, ranging from regulatory changes to international conflicts, influence the crypto market.
1. Regulatory Announcements and Changes
A. Government Regulations
Regulatory news is considered one of the most direct factors causing fluctuations in the crypto market. Cryptography-based currencies are legal in some countries and are fully embraced by the governments of some countries while others have banned them completely. For instance, when China came up with a ban on cryptocurrency mining and trading in the year 2021, the market was greatly affected.
Taking the example of Bitcoin, the market leader in the digital currency domain, it fell from about US$64,000 to US$30,000 or thereabout within a couple of months. This event served as an example of how governmental actions influenced the market’s sentiment and investor’s trust.
On the same note, positive regulatory information can similarly cause the prices to go up. For instance, when the United States Securities and Exchange Commission (SEC) came up with new policies, which showed that they would allow cryptocurrencies and even consider the Bitcoin ETFs, the market reacted positively. Another factor that contributed to the surges in the prices of cryptocurrencies was the legitimization of the asset class through major forms such as the introduction of Bitcoin futures on major institutional trading venues such as the Chicago Mercantile Exchange (CME).
B. Tax Policies
The prices of cryptocurrencies also depend on tax policies concerning the said digital assets. In places where transactions in cryptocurrencies are highly charged with taxes, there are normally low volumes of trading, which affects the prices; it plays the role of a ‘cap’ on the markets. On the other hand, when a country’s policies are conducive to the payment of taxes, there will be an increased amount of investment. For instance, Portugal has also introduced a policy of not imposing tax on cryptocurrencies which attracts investors on the market.
2. International Relations and Geopolitical Tensions
A. Trade Wars and Sanctions
Trade wars, sanctions, and other similar occurrences can cause unrest in the economy which may lead to fluctuation in the conventional financial markets. This uncertainty however may translate to manipulation of the crypto market in the process causing effect; resulting in calls for other forms of stores rather than the conventional stocks. For instance, during the trade war between the U.S. and China, the Bitcoin price went up several times because investors regarded it as an asset similar to gold.
Sanctions can also directly impact the crypto market. When the United States imposed sanctions on countries like Iran and Venezuela, there was a noticeable increase in Bitcoin transactions within these countries. This rise was partly due to the population seeking to circumvent financial restrictions, driving up demand and prices.
B. Global Conflicts
Global conflicts and instability can also influence cryptocurrency prices. The ongoing conflict between Russia and Ukraine has had notable effects on the market. For instance, after the invasion of Ukraine in February 2022, Bitcoin and other cryptocurrencies experienced a brief surge as Ukrainian citizens and others in the region sought to preserve their wealth amidst economic instability. The decentralized nature of cryptocurrencies made them an attractive option for people looking to avoid traditional financial systems potentially compromised by the conflict.
3. Elections and Political Uncertainty
A. National Elections
Elections, especially in major economies, can cause significant fluctuations in cryptocurrency prices. Political parties and candidates often have differing views on crypto regulation, impacting market sentiment. For instance, during the 2020 U.S. presidential election, the crypto market experienced volatility as investors speculated on the potential policies of the candidates.
Joe Biden’s victory and subsequent nomination of Gary Gensler, a blockchain and cryptocurrency expert, as the head of the SEC was initially met with optimism in the crypto community. However, subsequent regulatory crackdowns tempered this optimism, illustrating how political leadership can influence market dynamics.
B. Political Unrest and Instability
Political instability and unrest can also drive cryptocurrency prices. For example, during the 2019 Hong Kong protests, there was an increased interest in Bitcoin as a hedge against the devaluation of the Hong Kong dollar and potential capital controls. Similarly, political instability in Turkey, coupled with the devaluation of the Turkish lira, led to increased Bitcoin trading volumes in the country.
4. Legislation and Legal Proceedings
A. Anti-Money Laundering (AML) and Know Your Customer (KYC) Laws
AML and KYC regulations have been a focal point for governments attempting to regulate cryptocurrencies. The introduction of stricter AML/KYC laws can affect crypto prices by reducing anonymity, a key feature that attracts many to cryptocurrencies. For example, the implementation of the Fifth Anti-Money Laundering Directive (5AMLD) in the European Union led to stricter regulations for crypto exchanges, impacting trading volumes and prices.
B. Legal Proceedings and Court Rulings
In some cases, legal activities confined to cryptocurrencies or related companies might influence the value of a coin or share adversely. Notably, litigations like the SEC’s case against Ripple about the legal status of XRP dropped the price of XRP. On the other hand, negative legal results like decisions against the crypto firms in the courts or the dismissal of lawsuits might cause the opposite effect of the price to fall.
5. Monetary Policies and Economic Indicators
A. Interest Rates and Inflation
Cryptocurrency prices are indirectly affected by central banks’ monetary policies, such as interest rates, and inflation control measures. When the interest rates are low and inflation is high, a heavy trend with alternate digital assets is easily observed. All around the globe, in the year 2020, interest rates were lowered by central banks to boost the world’s economies hit by the COVID-19 pandemic. This drop in monetary policy led to a major crypto rally when Bitcoin, for instance, ousted its old all-time highs.
On the other hand, the restriction of the money supply by the authorities and the increment of interest rates lower the benefit of unsafe currencies and assets while cryptocurrencies are included. Moreover, the potential increase in returns on conventional financial instruments might be a reason for people to leave the crypto market that is if they did not.
B. Currency Devaluation
Devaluation of local currencies and very high inflation in certain states can result in a deepened financial crisis that ultimately leads to digital money being replaced by centralized cryptocurrencies holding the status of legal tender. In other words, in some countries like Venezuela and Zimbabwe, where hyperinflation has caused the loss of value of their national currencies, people have started to use Bitcoin and other cryptocurrencies to secure their money.
6. Technological and Legislative Innovations
A. Blockchain and Crypto-related Legislation
Blockchain technology and cryptocurrencies are promoted through laws specifically directed towards them that can have a positive effect on the market. For example, the stimulation of blockchain companies’ growth in Switzerland and Malta due to the establishment of beneficial crypto laws is the best example of this, which on the one hand is fostering creativity and innovation, and at the same time skyrocketing the market, directly instead of indirectly.
B. Technological Developments and Partnerships
Partnerships and the progress in the field of science due to the interaction of the political world, are often sources of change in the cryptocurrency market. By keeping blockchain technology as the main objective, the European Union’s investment in blockchain technology research and development has triggered incentives and attracted investors to the regional development of blockchain technology, which in turn caused an increase in blockade projects of these kinds leading to prices for associated tokens.
Conclusion
How political events impact the prices of cryptocurrencies is numerous and complicated. Different political factors including regulatory changes, international relations, national elections, and monetary policies may provoke considerable volatility in the crypto market. Forthwith, the need to grasp the connections becomes vital not only for investors who work in the field but for all stakeholders as cryptocurrencies ‘stretch’ towards the empowerment of mainstream society.
Future movements in the cryptocurrency market may be greatly affected by current political events; nevertheless, they are also the main factors determining the development of the crypto market. Regulatory clarity, technological innovation, and geopolitical stability are the building blocks that the cryptocurrency ecosystem needs to remain on track with constant development and increase the scale of the market. Therefore, being aware of political happenings and how they might influence your business is important for everyone involved in cryptocurrency.
