17 September 2021
Ever wondered why cryptocurrency is volatile? Well, many factors affect the price of crypto, such as - the demand and supply, total supply, trading volume, the exchanges it trades on, its position in the market, competing cryptos in the market, and so forth. But are these factors the only reason why cryptocurrencies are volatile?
There are over 5000 cryptocurrencies in the market, and their price fluctuates now and then. Moreover, the past few years have been a rollercoaster ride in the crypto-amusement-world. In any investment or market approach, risk-management plays an important role, but wouldn’t it be nice if you could learn what leads to crypto volatility and predict?
In this blog, let’s know What Makes Cryptocurrencies Volatile?
1. The Market Impact
The first cryptocurrency was launched in 2009, and ever since, it has received a tremendous amount of attention. But it is still regarded as an “Emerging Market”. The reason it is called an emerging market is in comparison with the other market approaches such as the stock market, forex market, gold market, and so forth.
Also, the crypto market size is considered minuscule; thus, even a slight change in the market can result in volatility. A single rumour, comment, news, updates, announcements, anything can influence the price movements.
For instance, if a group of investors decides to sell Bitcoin, it will create a fluctuation in the crypto market and lead to volatility; one example is pumping and dumping. The other event was when Elon Musk tweeted about Dogecoin that caused a spike in Cryptocurrency’s price.
Also Read, Factors That Determine The Price Of Bitcoin
2. Intrinsic Value
Cryptocurrency is believed to have little to no intrinsic value, since it is treated as a digital asset that is not backed by anyone or anything such as physical commodity or currency. Few cryptos have no intrinsic value, while others can be considered to have some intrinsic value because of their use-cases. There are theories that cryptos are entitled to intrinsic value due to their mining process. Thus, many believe that the change in the prices of cryptocurrency is purely based on speculations.
Cryptocurrency as an investment is based on speculations; wherein, the investor works on guesswork whether the price will move upward or downward, leading to buying and selling of cryptocurrency. Whereas, many investors are constantly working on this process of betting, causing further price volatility.
It's been over 10 years since cryptocurrency and blockchain were introduced. Since cryptocurrency and its technology is still emerging, it has various aspects to developments, breakthroughs, and launching. Thus, any new shift in the market affects and creates a price swing.
5. The Investors Profile
Unlike other markets like the stock market or real estate, anyone can enter the cryptocurrency market; anyone, from a novice to an institutional investor. This overall affects the crypto price because, in case the market is fluctuating even a little, the institutional investors might keep their calm; however, it could be a whole different scenario for the amateur crypto traders, resulting in volatility.
Also Read, 20 Ways To Protect Your Cryptocurrency
6. Lack of Regulations
Since cryptocurrency is based on a decentralized peer-to-peer network; it lacks a regulatory framework by the Government across the world. Being a global phenomenon with the absence of laws and regulations, the cryptocurrency market can be entered by anyone and can be manipulated, resulting in volatility.
7. The Role of Government
A change in the regulatory environment, tax, inflation, or ban on cryptocurrency or related factors can also influence the price of cryptocurrencies creating volatility.
8. The Role of Media
Media plays an essential role in any industry as it is, in a way, can stir, break or make a product (here cryptocurrency). Any headlines, news, updates, or announcement by the media can play a role to impact and affect cryptocurrency prices. It can also create panic and chaos amongst cryptocurrency users, resulting in volatility.
So what will change the Cryptocurrency Volatility?
A change in the volatility aspect of any market takes time, but one can expect it to stabilize over time. A regulatory environment, investor diversification, and a full-fledged outlook can have a positive impact on the cryptocurrency market.
To conclude, every market and investment approach has its risk involved and needs diligent research, analysis, planning, strategizing, and risk-management before investing and over time.