How internal and external factors determine the movement direction of the crypto market

Why External Shocks Change Everything

When analyzing any economic model, we often overlook an important question: which forces come from within the system and which forces come from outside the system? In the field of cryptocurrency, this question becomes particularly urgent. There is a technical term in economics called “exogenous variables,” which simply refers to those variables that are not affected by internal factors of the system but can have a profound impact on the entire system from the outside.

The Power of External Variables from the Perspective of Traditional Economy

Imagine a simple market model: the price of goods is determined by the actions of buyers and sellers. But what does this model overlook? It overlooks the key factor of raw material costs. When the government suddenly raises raw material tax rates or introduces new production standards, production costs rise, which in turn drives up the prices of goods. This external policy change does not come from the decisions of buyers and sellers, yet it can completely alter the market landscape.

A similar logic applies to the analysis of national economic aggregates. Natural disasters, trade policy adjustments, and changes in international relations—these are all forces that come from “outside the model”; they cannot be predicted or eliminated through internal economic activities, yet they can have a significant impact on GDP.

What external shocks is the cryptocurrency market facing?

The cryptocurrency market is similarly affected by external factors, and these factors are often more volatile than those in traditional markets.

A Sudden Shift in Regulatory Policy is the most direct external shock. The government of a major economy may suddenly change its attitude toward digital assets, introducing stricter regulatory frameworks or outright bans. This policy change comes from the political decision-making level and is unrelated to the operations of market participants, yet it can cause the entire market to experience severe turbulence within hours.

Technological breakthroughs and innovations are another important category of external variables. The introduction of new consensus mechanisms, layer two solutions, or cross-chain technologies often stems from the results of research and development institutions rather than market trading activities. These innovations can enhance the efficiency and security of blockchains, thereby improving the overall prospects of the ecosystem.

Changes in the Macroeconomic Environment can also exert pressure on the cryptocurrency market from the outside. Adjustments in the monetary policies of global central banks, exchange rate fluctuations, and dramatic changes in traditional financial markets—these factors, although occurring outside the cryptocurrency market, can attract or deter the inflow of traditional capital.

How to Understand the Mechanisms of Action of These External Forces

The significance of distinguishing between “internal variables” and “external variables” lies in its ability to help us better understand the true driving forces of the market. Internal variables are those factors produced by the interactions of market participants—trading volume, price discovery, liquidity, etc. However, it is often the forces from outside the market that can rewrite the market's direction at critical moments.

For cryptocurrency analysts, simply focusing on on-chain data and trading behavior is not enough. It is essential to pay attention to policy trends, technological developments, and macroeconomic trends at the same time. These external variables often provide us with the earliest warning signals.

Summary

Exogenous variables are key to understanding complex systems. In the cryptocurrency market, policy adjustments, technological advancements, and macroeconomic changes are all forces that cannot be determined by internal market factors but can profoundly influence market trends. Recognizing this allows investors to better cope with market uncertainties.