Social media and politics - how sentiments can affect the crypto market

Investy.ai August 20 2024

Saying cryptocurrency is complex would be the understatement of the year. The crypto market is also constantly changing, often driven by factors that go beyond traditional financial analysis.

While blockchain technology and market fundamentals still largely define the value of cryptocurrency, social and political sentiments are increasingly shaping market dynamics. As we’ve seen in the past few years, government regulations, social media trends, and even political events, all can influence crypto prices and are sometimes the cause of significant fluctuations.

Let’s take a closer look at this love-hate relationship between the intricacies of crypto and the world as we know it.

How do political events impact cryptocurrency prices?

Political events can sometimes bring more drama to the crypto market than the public. Policy changes, international tension, and government intervention all contribute to shaping market behaviors and price movements.

The upcoming US election is a prime example of a political event with the potential to influence crypto prices. But to be fair, election years can typically affect the economy as a whole, bringing uncertainty as investors brace for changes in fiscal policies, taxes, regulations, etc.

In these times, cryptocurrency becomes a refuge for those seeking to hedge against traditional market risks. However, depending on the political climate, the market could see increased volatility. For example, some time in 2021, former US president Donald Trump had expressed a negative view on Bitcoin, calling it a scam. It didn’t help that at that time, BTC was on a heavy decline since a month prior, when China announced its crypto ban.

Trump later flipped the switch, saying he was all in on crypto and would even pay off national debts with it. Ironically, though, that did not help the price of major coins like everyone hoped it would.

Such events can cause fluctuations in the market as investors react to potential changes that could lead to a less favorable future.

How does social media affect crypto market trends?

To no one’s surprise, really, social media has become a near unstoppable force over the years in spreading news, awareness and, unfortunately, as well as rumors and negativity. 

In recent years, its influence on market trends, especially for cryptocurrency, has been developing. Platforms like Twitter (X), Reddit, and YouTube aren’t just sources of information; they are where public opinions are formed and market sentiments are swayed. A single tweet from the right person can spark massive buying or selling, leading to sharp price swings.

Elon Musk is infamously known for his endorsement of memecoins, namely Dogecoin, and his tweets over the years on crypto had caused pretty wild fluctuations in prices.

While it can drive positive movements and spur market growth, social media can also lead to panic selling and crashes. A sentiment analysis tool dedicated to social media was eventually created to predict short-term market movements, further underscoring its influence.

Government regulations vs the crypto market

There is an arch rivalry in the crypto space, and it’s not between Bitcoin and Ethereum: it’s government regulations and crypto. 

As digital currencies challenge traditional financial systems, governments around the world become increasingly creative in how to regulate them. Regulatory developments, big or small, have a direct impact on market sentiment and crypto prices.

In the US, the Securities and Exchange Commission (SEC) and other agencies have been trying to establish a framework for cryptocurrency. The outcome of the upcoming election may have major implications on the crypto market. Trump and Kamala have already expressed different opinions on cryptocurrency and how they wanted to deal with the industry.

Internationally, regulations vary widely. For example, China had expressed complete disinterest in crypto or anything involving it in the past, culminating in a nationwide ban, followed by crackdowns on mining. This had caused prices to decline around that time. On the other hand, countries like El Salvador, which adopted Bitcoin as legal tender, can create bullish trends by embracing crypto-friendly policies.

Takeaway

Social media and politics can shape the market in profound and often unexpected ways. For investors and traders, understanding the connection between politics, social trends and market behaviors is essential in navigating the world of cryptocurrency. 

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