Cryptocurrencies gained a lot of popularity recently. However, there are many people who steer clear of these coins and the reason behind this is their high volatility. A simple explanation for the reason behind the high volatility of cryptocurrencies could be that it is at a nascent stage when compared to other types of currencies and investments. Now let us explore some reasons for high volatility in detail.
Demand And Supply
Prices for most goods and services are influenced by supply and demand. As the number of Bitcoins in circulation and the amount of money individuals are willing to pay for them determine the Bitcoin’s worth, That means that just 21 million coins are in existence.
If supply and demand remain in balance, prices will continue to rise and fall in tandem. The value of fiat money is defined by the government that issues it and the economic circumstances it confronts, despite the fact that exchange rates between countries might fluctuate. You can check out the current market prices at https://www.okx.com/markets/prices.
Because Bitcoin has only existed for a brief period of time, it has little to no importance. The pricing process is still in its discovery phase. Prices are expected to fluctuate as a result of investors, consumers, and the government’s concerns about early growth. If the market can be controlled, prices can be stabilized.
Because Bitcoin is the most popular cryptocurrency, people want more of it. The Bitcoin market is difficult to engage in for long periods of time because wealthy people keep their Bitcoins locked up. According to projections, less than 10,000 individuals would hold more than a third of all bitcoins by the end of 2023. The Assets and Exchange Commission (AEC) is being pressured by brokers and other financial institutions to enable Bitcoin-backed securities to be traded.
Bitcoin’s recent volatility may be due to the actions of these individuals. There are some Bitcoin investors who don’t know how to transfer their big holdings of Bitcoin into fiat cash without impacting the Bitcoin price, and this is causing some concern. They are referred to as “Bitcoin whales.” Having whales sell their Bitcoins would cause concern among other investors, leading the currency’s value to plummet.
Owners of Bitcoin might face huge losses if they are unable to liquidate their holdings in a timely manner. Large investors may only be allowed to sell one Bitcoin every day if the price does not fall below $50,000. Investors would suffer significant losses if they attempted to sell all of their coins at once.
Bitcoin may be a viable business choice if decentralized banking and the metaverse, two upcoming technologies, are taken into consideration. Bitcoin may or may not be used or valued by these systems.
The Bitcoin price may be affected by governments’ opinions on cryptocurrencies. The Internal Revenue Service classifies Bitcoin, for example, as a convertible virtual currency since it can be exchanged for real money. The IRS views Bitcoin as a capital asset if you buy it to invest in.
Because of the way the IRS interprets taxation, those who use Bitcoin must pay taxes. Taxes have an influence on Bitcoin’s market price, but not on its volatility, in the absence of regular changes in tax policy.
In addition to investor sentiment and government regulations, the mainstream media’s coverage of Bitcoin has a significant impact on the price of the virtual currency. A variety of factors have a role in price changes.
One of the biggest reasons behind the high volatility of cryptocurrencies is their newness. Anything that is new takes time to settle. Investors and speculators are still struggling to understand this novel concept. Cryptocurrencies have gained a lot of heat across the world as an asset but they are not recognised As the traditional assets like gold or equity as of now.
With the passage of time more and more people are able to understand and accept this new concept. Back in the day when Tesla refused to accept cryptocurrencies as payments, leading to the fall in the value of bitcoin. On the other hand when Elon Musk tweeted about ‘doge’ which led to rise in the price of dogecoin.
Lack Of Centralized Agency
Traditional assets have a centralized agency that controls and monitors them however that is not the case with cryptocurrencies. They are not controlled by any entity like bonds, equity and Fiat currency. The lack of any regulatory body makes the investors skeptical.
Another important factor is utility. To what extent people use crypto in their everyday life is another important factor. When more people will use it to spend on buying goods and will not just hold them then the prices will move up. As more and more companies, restaurant chains and online stores are accepting cryptocurrencies in the form of payment, their prices are likely to increase.
It Is A Purely Digital Currency
Most cryptocurrencies such as bitcoin are entirely digital assets and they are not backed by anything like a commodity or a currency. Now this means that their prices will be set up according to the laws of demand and supply. Because the supply of several cryptocurrencies such as bitcoin is predictable or fixed, the price largely depends on the demand side. So when the demand is high prices will increase and vice versa.
One of the biggest reasons for the high volatility of cryptocurrencies is speculation. Investors generally bet that the prices of several cryptocurrencies will either go up or down by selling or buying them. The speculative nature of the cryptocurrency market in fact attracts many speculative traders who look to make big money by getting the upswings. So if you sell a cryptocurrency just before it crashes you can gain profit similarly when the price of any cryptocurrency rises and you buy right before it does that you will make big money.
The Importance of Emotion
Cryptocurrencies will become more widely accepted as more people become aware of the elements that affect their movement. It’s still a speculative market, so investors purchase and sell depending on their own feelings.
Cryptocurrencies are a popular investment choice for many millennials. They want to make money rapidly through investing. As a result, when they lose a large amount, they tend to exit the market, which results in market volatility.
These were some of the main reasons that made the prices of the cryptocurrency extremely volatile. Investors find it difficult to understand the upswing or the downswing of the crypto market. However, understanding that the crypto market is volatile can also help you to be prepared for better market brands that are using cryptocurrency.