What Makes Crypto Volatile?
A lot of people in this space are wondering what makes crypto prices so volatile. Take a look closer what makes crypto market volatile here.
As a relatively new asset class, cryptocurrencies has performed well in the past decade yielding higher returns than traditional equities. This makes crypto an appealing proposition for the masses as an alternative way to diversify their portfolios.
However, one caveat to the crypto market is its volatility. Prices in the crypto market can often swing by double digits, a stark contrast to the stock market, gold, real estate, and other more traditional assets.
So, what actually influences the price of cryptocurrencies? What makes crypto volatile?
In this article, we will explore and take a closer look at the potential factors that influence the volatility of the crypto market.
New to crypto? Start with our crypto 101 guide.
What is cryptocurrency?
Before we go into the details, let’s get a working definition first of what cryptocurrency is.
Cryptocurrencies, or crypto, is a form of digital currency that is encrypted and secured by cryptography and stored on a digital global ledger known as a blockchain. The way cryptocurrencies are designed makes it impossible to counterfeit or double-spend.
You can also think of cryptocurrency like fiat, or government-issued money but in digital form. You can buy products and services with cryptocurrencies, send and receive them globally, just like fiat money.
A defining feature of cryptocurrencies that make them different from fiat currency is that they are not issued by any central authority, rendering them theoretically immune to government interference or manipulation. They are also decentralised, making them immune to external intervention.
Further reading: What is cryptocurrency?
What is volatility?
Volatility is when the price of a stock moves up or down over a short period of time. It use to describe the price of a security or to describe the variance of those prices over time.
Volatility is one of the most important factors in determining whether a financial instrument should be considered for investment purposes.
Generally speaking, someone would not want to invest in something that has too high a price volatility compared to its expected return.
Since such volatility could cause substantial losses despite having an expected return that’s positive overall.
The concept of volatility also plays into “risk management” techniques used by financial institutions. Which attempts to reduce exposure to sudden price movements via options contracts and other derivatives.
Read more: Maximising the Risk to Reward.
What makes crypto market volatile?
Volatility is one of the defining characteristics of cryptocurrencies that make them so interesting to investors, traders and enthusiasts. Simply put, crypto prices are unpredictable.
However, this does not mean that crypto is a gamble or a game of chance. It just means that there are many factors involved when it comes to the potential value of a coin in the future.
The cryptocurrency market has seen large swings in price over short periods of time. In late 2013, Bitcoin experienced a surge in price from around $100 to over $1100 within a six-month period before settling back down to the $200-$300 range. This kind of volatility can make it difficult for investors who are looking for stability and predictability in their investments.
To get a better understanding of why crypto markets are so volatile, we’ll take a look at the major factors that contribute to this phenomenon – using Bitcoin as an example.
Supply and Demand
Supply and demand influence the prices of most commodities more than any other factor. Bitcoin’s market value is primarily affected by how many coins are in circulation, and how much people are willing to pay for them.
For example, the more people who want to buy bitcoin, the higher its price will be. The more people who want to sell Bitcoin, the lower its price will be. This is a simple concept that applies to most commodities, including gold and silver.
The supply of Bitcoin is limited. There can never be more or less than 21 million Bitcoins in the world. Currently, the number of Bitcoins in circulation is around 19 million, which means that we’re less than halfway through the total number of bitcoins that will ever exist.
There will no longer be any profit from mining Bitcoin when the limit is reached. Moreover, it is difficult to predict whether the price will decrease or increase in the future.
Further reading: Bitcoin Investment Guide.
Global events and news
The other aspect that affects volatility of the crypto market is news. News has a big impact on how people perceive cryptocurrencies, and this has a direct effect on the price of a coin.
For example, after the Bureau of Labour Statistics reported consumer prices for the month of April jumped 8.3%, which was slightly higher than expected by economists polled by Dow Jones. The price of Bitcoin dropped below $27,000 level as a recent sell-off in the cryptocurrency spaces.
In the case of news that is related to inflation or economic instability in some countries, the market will react negatively.
Many people are worried about their money and they tend to keep their cash back from their investments in order to keep their liquidity.
This is why we see such big drops in prices when bad news comes to the market.
Cryptocurrencies are still a relatively new phenomenon and people are trying to figure out how to evaluate their importance, what role they play in the global economy, and how they should be regulated.
The ways in which cryptocurrencies can be used to facilitate illegal activities has been a major focus of attention by regulators.
Because of this, rumours about possible new regulations impacting crypto prices tend to cause dramatic price fluctuations in the short term (even though it’s debatable whether or not these fluctuations actually have any long-term consequences).
For example, when China banned ICOs in late 2017, the price of Bitcoin fell from $4,584 shortly before the announcement to around $4,350.
This is an interesting phenomenon which could potentially serve as an opportunity for investors who are able to predict and profit from these fluctuations.
More on Bitcoin: Read our complete guide on Bitcoin.
How to Survive Market Volatility?
When you see how volatile the crypto market is, it would be hard for you to decide whether or not you should invest in it.
That said, it would be best if you do research first before making any purchase. You should ask yourself if the risk is worth taking especially if you have limited resources available.
In order to survive on the crypto market, one way that you can use is Dollar Cost Averaging. This is a method wherein you buy a fixed amount of coin each month regardless of price. It helps you to avoid getting affected by any sudden fall in price.
For example, if the price falls down drastically. You will still have the same amount of coin to trade with when it rebounds. By doing this, you will be able to transact even if there is a sharp fall in price.
For regular folks who use the Dollar Cost Averaging method, more benefits can be felt — less stress from timing the market, and more time and energy to do other productive things.
You can start to use dollar cost average with Easy Crypto’s auto-buy feature. We like to simplify every process. This feature allows you to buy cryptocurrencies even without having to visit our website.
In conclusion, there are many factors that affect the volatility of cryptocurrencies. This article explains in greater detail what causes this volatility, as well as how the cryptocurrency market operates.
Although we cannot offer any guarantee of future returns from cryptocurrencies. We hope that this will bring you a better understanding of the crypto market volatility.
And, that will help you make more informed decisions when it comes to investing in the digital currency space.
Further reading: Explore more topics in our learning hub at Easy Crypto.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated October 7, 2022