Although the price of Bitcoin is continuing to rise in recent weeks, the market has always had erratic highs and lows, and naysayers have always seen Bitcoin and all other cryptocurrencies as a doomed bubble that will eventually burst.
Investors see the realm of digital money as a good development, a type of “Money 2.0” that will liberate finance and feed the metaverse.
One thing hasn’t altered despite the swinging prices and shaky sentiments: cryptocurrency is still divisive, dangerous, and extremely volatile.
But why is Bitcoin so volatile is the main issue that most worries potential investors and crypto exchange enthusiasts.
The cryptocurrency market has always been erratic, but the most recent few months have been especially crazy. Here are four reasons that make cryptocurrencies an incredibly volatile investment for anyone.
Stage Of Price Discovery
Cryptocurrencies’ volatility is mostly caused by their youth, as cryptocurrencies are no different from other innovative ideas in that they require time to mature and gain acceptance.
It is still early in the price discovery process since the asset class, the market, and investors/speculators are all still getting their bearings.
Despite their rapid rise to recognition (or renown) on a global scale, cryptocurrencies are not as commonly accepted as an asset class as older assets like gold or stock.
Growing acceptance and market maturity go hand in hand. As a result, when Tesla said that cryptocurrency would not be accepted as payment, the value of Bitcoin fell sharply. But after Tesla CEO Elon Musk wrote “Doge” in a tweet, Dogecoin’s value rose.
Similar to how share prices frequently rise when a well-known investor buys stock in a certain company, such significant occurrences or individuals raise volatility.
Due to a lack of regulations and awareness, trading has become quite speculative in recent years. By placing bets on price rises or declines, investors speculate on price changes, and therefore, there is a lot of volatility.
Speculation Is All Around
Speculation is what drives the value of the cryptocurrency market. To increase their earnings, investors placed bets on whether the prices would rise or fall.
The significant volatility that results from these speculative bets is caused by a quick entry of money or a sudden outgo of money. With cryptocurrencies, you can never be 100% sure whether a given price will go up or down.
More investors will be aware of the elements affecting cryptocurrencies’ movement as they become more widely used and acknowledged. A significant amount of the movement is speculative because investors buy and sell mostly based on mood.
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Even those who are thinking about investing in cryptocurrencies long-term do so because they believe the asset class will get more recognition. For instance, Tesla CEO Elon Musk explained that he owned Dogecoin since many SpaceX and Tesla employees also do.
As a result, a lot of young people are making cryptocurrency investments. Their purpose is to rapidly invest and earn. As a result, they typically exit the market after suffering a significant loss, which raises market volatility.
There Is An Absence Of A Controlling Body
In contrast to other asset classes, like stocks and bonds, which do have some form of the regulatory or controlling body, cryptocurrencies, by their very definition, are not subject to the oversight of any central authority in the same way that fiat currencies, stocks, and bonds are.
This makes them more volatile by definition, as the absence of a controlling body is one of the main perks of this new class of financial assets.
Major Holdings And Limited Supply
Unlike traditional money, some cryptocurrencies like Bitcoin have a limited quantity. Although the total number of Bitcoins in circulation is restricted to 21 million, demand and supply factors still come into play.
For instance, the maximum supply of Litecoin is 84 million, whereas the maximum supply of Chain Link (which is based on Ethereum) is 1 billion.
Additionally, because cryptocurrencies are digital assets, their prices are solely determined by the market forces of supply and demand. Because of the limited supply, certain organizations have considerable sums of cryptocurrency.
As a result, they are in a position to influence the rise and fall of the cryptocurrency markets by selling or purchasing additional coins. This affects increasing the overall volatility.
It is correct that the market for cryptocurrencies is more volatile than traditional markets. However, the potential for big gains may more than compensate for the risk of volatility (returns).
Volatility is not the enemy in this context. Given the potential for big earnings, volatility is not a significant obstacle to overcome.
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Final Thoughts
With all things considered, it’s not difficult to understand why the cryptocurrency market is so volatile. There are simply too many factors that determine the value of each coin on the market, and these factors interact with one another in a complex manner.
That is probably why economists are still debating how best to measure things like unemployment, inflation, and gross domestic product.
And still, cryptocurrencies have been proven increasingly helpful in speculating on the future prices of goods that you might want, services that you need, or investments that you might make.
As long as value swings between those who want to buy and sell remain unpredictable, crypto remains an incredible tool for investment.
