The cryptocurrency market was a bubble touted to burst by many an expert, only for it to last and spread to several important sectors the world over. The market has been volatile since the inception of its concept with the introduction of Bitcoin, yet the last few years have presented a particularly rocky ride. Many investors have ridden the upswings and made millions, while others have ended up losing money during market downturns.
Those promoting and marketing a cryptocurrency to investors, as well as investors looking to lock in a summation of money as an investment should know how to analyse a market and possibly predict a volatile upturn to the market they are looking into. To understand the volatility of the cryptocurrency market, we should understand the factors that influence its price and use them to our convenience and advantage.
Factors influencing cryptocurrency volatility
Cryptocurrency is an emerging market
Despite Bitcoin having hit the market as early as 2009, and all the media attention that cryptocurrencies have garnered over the years, the market is miniscule when compared to the market of gold and fiat currencies. The total value of the gold market is $ 7.9 trillion, while that of the United States stock market is $ 28 trillion. When compared to the cryptocurrency market at its peak, its value was $ 800 billion.
A relatively small market size eventually means that smaller forces can enforce a large effect on the price of a cryptocurrency, thus leading to its volatility. To put it into perspective, if some investors decide to sell $ 700 million in gold, a bare ripple would be created in the market. If the same were to happen with respect to Bitcoin, the market would destabilize, and its price would crash.
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Cryptocurrencies are digital in nature
Most cryptocurrencies are purely digital assets and do not find backing against any physical commodity. Its price is dependent on its supply and demand. Cryptocurrencies like Bitcoin and Ethereum have a fixed supply, and its price is dependent on the number of people buying a particular cryptocurrency.
If people lose faith in the value of a cryptocurrency, they are bound to sell. This may lead a reduction in the price of that cryptocurrency, thereby influencing other people to sell as well. The opposite can happen as well, leading to a rise in price of a cryptocurrency, encouraging more people to buy, or cash out.
Its technology is being constantly developed
Blockchain and alternative cryptocurrency technologies are being constantly developed and are in its early stages. It will take time for the market to mature, as it has been a mere decade since the first cryptocurrency, Bitcoin’s, whitepaper was published. Blockchain technology is transparent and eliminates the middle man between transactions, hence it is being actively pursued by several companies and Governments as well. There are several new promising projects rolling out, with the intention of competing with existing technology and usurping the market.
Of the many driving forces behind the volatility of the cryptocurrency market, speculation is one of the biggest. Investors may predict the price of a cryptocurrency to fall or rise, eventually buying or selling that particular cryptocurrency accordingly. The volatility of the market itself is a force which lures prospective investors into buying a cryptocurrency in order to make quick profits of a wave of rise in the value of a cryptocurrency.
If you know how to read a cryptocurrency market, you can try to predict when the value of a particular cryptocurrency may shoot up, buying and selling accordingly and making profits riding its wave of growth. Speculative bets with respect to the same end up bringing about volatility.
As is the case with media, media hype has a massive impact with respect to speculation and prospective investors. Potential investors looking to ride a wave of growth in a cryptocurrency are in a constant lookout for headlines with respect to the launch of a new market, its decline or rise. The fastest to a new opportunity often end up profiting the most, while the slower ones are more likely to lose more, or not gain as much.
Gaining information from non-credible sources can hamper your chances of differentiating right from wrong. Many investors and businessmen ride the wave of hype with respect to buying, selling, or introducing a facet into their business which caters to this buzz.
Few barriers to potentially investing
As is the case with the stock market and real estate, there are very few barriers to entering into the world of cryptocurrency. Anyone with an internet connection and can start trading in cryptocurrencies without a hassle. Institutional investors are cautious when it comes to investing in cryptocurrency, while millions of amateur investor’s trade ride the waves of the market in the quest of profiting from it. These factors make the market a fairly less experienced and educated one with respect to other trading institutions. This makes cryptocurrency vulnerable to hype, and in turn volatile in nature.
Conclusion on what you should know about the crypto volatility
All these factors add up to ensure the volatility of the cryptocurrency market. No one can truly predict the nature of a particular cryptocurrency, and several experts are shown to wrong with their predictions. Understanding the nature of a cryptocurrency, its possible points of rise and fall, and the overall effect certain players may have on its price is necessary if investing in it.