Cryptocurrency which was made publicly available in 2009 when the most well know Crypto coin, Bitcoin was created. It rose to popularity in 2010, and its price has quickly increased by thousands of dollars, sometimes fluctuating thousands of dollars each day.
So why is Bitcoin as well as other cryptocurrencies so volatile? Many of the reasons for price volatility in main stream markets hold true for cryptocurrencies as well, but there are many specific contributing factors to cryptocurrency’s volatility. Understating these factors will help you invest smarter and avoid losses.
Like most other securities, assets and investments, the price of certain cryptocurrencies depends heavily on supply and demand. (You can check the prices of cryptocurrencies here)
The total number of Bitcoin and other alt-coins is a pre-determined number. Therefore, when more coins are mined, the supply of bitcoin diminishes, and its price may explode. However, some coins have more total supply than others, which contributes to increased volatility
Bitcoin and cryptocurrency as a whole is still a very new and emerging market. This implies that prices will continue to fluctuate as investors, consumers, and governments work through the first growing pains and worries until prices stabilize—assuming that a stable equilibrium can be achieved.
Despite all the media attention, this market remains insignificant in comparison to traditional currencies (fiat) or even gold. This implies that even tiny factors – such as a group of people holding huge quantities of crypto currencies – may have an impact on the market. Even if they merely sold Bitcoins, it would be enough to bring the entire market down.
As mentioned above, accounts that own huge quantities of a cryptocurrency may begin selling, causing a price fall. These accounts are known as ‘Whales’ because they have a significant holding (opposed to fish who own little in comparison) and may influence the market if any of them reach an agreement.
Investors actively monitor the behaviour of crypto whales. It is hard to determine if they intentionally influence prices, but they can cause values to increase and fall due to the interest others have in their assets.
Bitcoin and other cryptocurrency’s value results from its decentralized network. This is because there is no central power that can intervene and influence the prices in the market. Ria Bhurotia, former director of research for Fidelity Digital Assets, stated that the “supply of bitcoin is perfectly inelastic. “A rise in demand cannot result in the increase in supply of bitcoin or increase the speed at which bitcoin is issued, “Bitcoin’s volatility is a trade-off for a distortion-free market.”
Because news and media sources require material for their readers and viewers, they frequently publish facts and forecasts from "experts" that are not necessarily supported by corroborated evidence.
You're likely to hear someone who is significantly engaged in Bitcoin or any other cryptocurrency predict that the currency will soon drastically increase in value. Others advertise freshly developed cryptocurrencies to grab Bitcoin's market share. However, most of this media attention and visibility works to impact Bitcoin and other coin's price in favour of those who own a big number of those coins.
Cryptocurrencies typically are at the blunt end of government regulations, which contributes to its volatility. For example, The Internal Revenue Service (IRS) believesBitcoin to be a convertible virtual money since it may be converted to cash.Bitcoin is also considered a capital asset by the IRS if it is utilized as an investment instrument. Furthermore, if you mine a Bitcoin, you must record it as income depending on the market value of the currency on the date you receive it.
International regulatory affair also has an effect on the vitality of cryptocurrency, for example in China. In 2021, China's government and central bank declared that all cryptocurrency transactions and facilitation were prohibited. Following a meeting of the State Council Financial Stability and Development Committee inMay, a huge shutdown of cryptocurrency mining farms in the country was implemented. Rumours of a movement to halt mining in the nation had led prices to fall. (Full article here)
Market sentiment can have a significant impact on crypto market prices. As seen in theFear and Greed Index here, market players act very differently whether they are fearful or greedy. This then influences the price of Bitcoin and other coins, as trading volume increases or decreases.
Volatility can be daunting for investors, but it’s the price that investors pay for the currency’s limited supply and its lack of a central bank to control that supply— precisely the features supporters that say give it value.
Crypto is still a new market, and “all investments carry risk, and just like stocks, crypto is subject to price swings,” said Noah Perlman, Gemini’s chief operating officer. “Bitcoin is still a young asset class, but it’s one of the best performing of the last decade.” (Full article here)
At the end of the day, “high-risk, high-reward”does tend to be the rule of investing, and it is especially true of crypto.
Now that you have learned about cryptocurrency’s volatility, you can refer to it when making crypto investment decisions. Get started with digital currency quickly and easily through Bitbuy, Canada’s most secure exchange platform. In only three steps, you’ll be able to buy and sell crypto. Create your account, add funds, and start investing. It’s that easy.