Why are cryptocurrencies so volatile?
Most cryptocurrencies, including Bitcoin and Ether, are purely digital assets with no backing of any physical commodity or currency. Which means their price is determined entirely by the laws of supply and demand. In absence of any other stabilising factor, like government backing, any number of reasons may lead to a fluctuation in demand or supply.
The main reason seems that they expect the price to get even higher in time. Some people think the price will go up because Bitcoin is protected against inflation because of its 21-million cap on coin. And some expect it to become widely used by financial services institutions as a store of value.
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Premining is the mining or creation of a number of cryptocurrency coins before the cryptocurrency is launched to the public. Rumors about regulations tend to impact Bitcoin’s price in the short term, but the significance of the impacts is still being analyzed and debated. Particularly stubborn technological hurdles like the blockchain scalability problem cause downward pressure on crypto prices when they aren’t solved in the timeframe that many expect. Or, when their consequences get crystallized in the form of network congestion and high transaction prices.
As of the date this article was written, the author does not own cryptocurrency. As such, it is a reasonably stable commodity, as far as price, demand, and supply go. After the hype died down and investors realized the ETF was linked to Bitcoin through futures contracts traded on the commodities market, prices dropped back down around $50,000. When media outlets announced Proshare’s introduction of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks. Investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange, causing a price jump to more than $69,000.
The crypto market is still relatively new, so volatility is expected and vulnerable to “big fish” or “whale” traders, the owners of large amounts of crypto. “Since large volumes of crypto are owned by few large investors, their trade decisions can make the crypto market more vulnerable,” he added. The main difference between cryptocurrencies and company stocks, for example, is that the stock exchange trades stocks or shares of a specific company. In contrast, cryptocurrency exchanges trade in digital currencies. These factors are primarily related to nascency of the currency and the dynamics of the Bitcoin markets.
There are many instances of a cryptocurrency’s growth being cut by a government tightening its policies on crypto. Recent restrictions imposed by China contributed to a period of severe crypto volatility volatility in bitcoin prices. Despite this, seasoned cryptocurrency investors believed that such stories were evidence of the market maturing beyond its chaotic formative years.
The Future of Cryptocurrencies
Success could mean significant value accrual to its token, but the project could also fail. Early investors have no choice but to flail back and forth between hope and despair. Rather, it’s a phenomenon that exists in all financial markets for a mix of reasons. Cryptocurrency skeptics might see crypto’s volatility as a danger sign, a reason to stay away. However, sometimes volatility can benefit a new fast-growing asset, like crypto. And yet, many people are buying Bitcoin and willing to pay ever-higher prices for it.
- Crypto traders frequently panic in instances when experienced traders might maintain their composure.
- With cryptocurrencies, their value is subjective, and it is difficult to identify their sources of value,” Dr Sellos explained.
- A store of value is an asset’s function that allows it to maintain value in the future with some degree of predictability.
- In absence of any other stabilising factor, like government backing, any number of reasons may lead to a fluctuation in demand or supply.
- Stocks are also regulated, subject to oversight by the SEC, and other government agencies.
The more retail investors who enter the market, the scarcer and more inexperienced the market becomes, worsening volatility. Volatility is one of the most important variables in determining investment risk. Traditionally, investors will take on a high level of risk if they believe the potential reward is worth the possibility of losing some of their investment. As cryptocurrency is a small market of digital assets with tons of speculation, the media has a massive impact on where the prices go.
Why Is Bitcoin So Volatile?
The price reflects investor’s expectations for the future of Bitcoin, and this future is influenced by actions taken in the present. That’s why cryptocurrencies that have a lot of coins in circulation experience lower prices than cryptocurrencies that don’t have as many coins in circulation. This is because when there are more coins on the market , the price goes down, and this is one of the reasons Dogecoin is unlikely to ever reach $1.
Imply put, volatility is the change in a security’s price over a given period. If the price stays relatively stable, the asset has low volatility. Highly volatile security hits new highs and lows quickly and has rapid increases and breathtaking falls. The blockchain or other alternative technologies on which these coins function are still evolving.
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Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. Again, even though some of these events weren’t directly linked to bitcoin, the public panic that immediately followed heavily affected the value of BTC. The content of this article is not a work product of any research department of Swissquote or its affiliates.
Many see it as far too risky to go near at all, let alone invest serious capital in it. Blockchain and other alternative crypto technologies are still in their early stages of development. It’s barely been a decade since the idea of cryptography-based decentralized currencies was published in the Bitcoin whitepaper, so it will be a while before the market matures. Nevertheless, many companies have already adopted blockchain technology and are actively using it for marketing and advertising purposes.
Why is Bitcoin so volatile? @scoopit https://t.co/LmKFo46BPM
— tradebitcoinis1 (@tradepower1) January 4, 2023
It has only been a decade since the Bitcoin idea was first proposed. There is the scalability problem, when a smart contract is not validated with the timeframe expected, creating sudden downward pressure. Price swings signal important information to investors — and build previously unseen levels of transparency into the system.
Derivatives allow investors to gain price exposure to an asset without owning it directly. In that time, it has gone from a small project with a dozen users to a reserve currency used by Fortune 500 companies. The world is still figuring out how Bitcoin will fit into the global economy, and sentiments about the currency are redefined on a regular basis. Crypto whales can manipulate crypto prices, no matter the cryptocurrency, be that Bitcoin, Ethereum, Dogecoin, or otherwise. And as longtime value investor Bill Miller pointed out in a CNBC interview earlier this year, “One of the interesting things about bitcoin is that it gets less risky the higher it goes.”
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The information provided is not meant to provide investment or financial advice. By shrinking the amount of Bitcoin in circulation beyond the limits built into the system, Bitcoin’s liquidity could dry up. This means that movements to buy or sell could quickly influence its price, driving it up or down violently. Since its launch in 2009, Bitcoin’s price history has been impressive and experienced more than a few conspicuous crashes. A cryptocurrency’s blockchain node count shows how many active crypto wallets present on the blockchain are searchable online for transparency purposes.
Sign Up NowGet this delivered to your inbox, and more info about our products and services. Tesla, which has a $1.5 billion stake in bitcoin, fell roughly 2.5% Wednesday. [It’s] only 13 years old and thus doesn’t have much of trading history.” Find out about Bitcoin’s artificial inflation process works and what it means for Bitcoin’s price and its users. His work has been published in The Diplomat, IBM, Investing.com, FXEmpire, Investment Week and FXStreet. If your cousin’s new restaurant had tradable shares, they’d probably be as volatile as crypto.
This results in significant shifts in market value depending on investor sentiments and the effects of decentralization. Unlike assets that have stood the test of time and are now subject to fewer fluctuations, new currencies are greatly impacted https://xcritical.com/ by a number of external factors we’ll explain below. However, 2019 will be a totally different year for the cryptocurrency sector. Speculative investing is no longer popular, and instead, consumers are seeking for cryptocurrency functionality.
Bitcoin supply is limited to 21 million, but since it is among the most popular cryptos, demand and supply forces come into play. For instance, Litecoin has a maximum supply of 84 million, while Chainlink’s (Ehtereum-based) limit is 1 billion. Cryptos have gained global prominence in the last few years, but as an asset class, they are not as accepted as traditional assets such as equity or gold. That is why when Tesla indicated that cryptocurrencies will not be accepted as a mode of payment, the value of Bitcoin crashed.
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SoFi does not guarantee or endorse the products, information or recommendations provided in any third party website. Get access to experienced career coaches—complimentary for all SoFi members. Bitcoin’s inventor Satoshi Nakamoto placed a cap on Bitcoin’s production, i.e., 21 million units.