Let's talk about the cursory check of historical price charts of cryptocurrencies. It is revealed that crypto prices experience higher peaks and lower troughs at a faster and greater rate than in conventional markets. Bitcoin's price increased by 125 percent in 2016, then it increased again in 2017, this time over 2,000 percent. Bitcoin's price fell again since its 2017 peak when it reached new all-time highs. Bitcoin continues to establish new all-time highs in 2021, more than doubling its highest price during the 2017 bull run.
Most of those factors that cause price volatility in traditional markets also apply to cryptocurrencies. Price movements in crypto and conventional markets are fueled by news and anticipation. However, because crypto markets have little liquidity compared to traditional financial marketplaces, their impact is magnified. This is due to the fact that crypto markets lack a balanced environment of investment firms and huge trading organizations. Because both feed off of one other, increased volatility and a lack of liquidity may be a deadly combination. Most cryptocurrencies, with the exception of bitcoin, lack developed and frequently used derivatives markets. Cryptocurrency prices occasionally display healthy volatility similar to that seen in mainstream markets due to the influence of day traders and speculation.
The main concern of the bulk of investors is why the bitcoin price is so unstable. The crypto market has always been turbulent, but the previous three months have been especially tumultuous. The market's trajectory is decided by a number of factors:
· Stage of price discovery
The fact that cryptos are new is the fundamental cause of their volatility. All new ideas need time to integrate and become accepted, and cryptocurrencies are no exception. The underlying asset, the marketplace, and investors/speculators are all still getting their bearings; therefore, price discovery is still very much in the early phases.
Cryptocurrencies have acquired worldwide fame (or infamy) in recent years, but they are not as widely acknowledged as traditional assets like stocks or gold as an asset class. Increasing market maturity and acceptability go together. Consequently, when Tesla stated that cryptocurrencies would not be accepted as any mode of payment, Bitcoin's value plummeted. However, the price of Dogecoin increased after Tesla CEO Elon Musk put 'Doge' on his Twitter post.
Such influential events or individuals contribute to Cryptocurrency volatility, much as when a well-known investor purchases a company's stock, the value of that stock tends to climb.
· The absence of a regulating body
Similar to other asset classes with regulating or controlling authorities, cryptocurrencies are not managed by anybody in the traditional way of fiat money, stocks, or bonds.
More investors will comprehend the elements that drive the movement of cryptos as they become more popular and acknowledged. So far, much of the activity is speculative, with investors buying and selling based on their emotions.
Even long-term investors are interested in Crypto volatility because they believe the equity market will achieve popularity.
· Limited Supply And Major Holdings
Many cryptos, such as Bitcoin have a finite quantity, unlike conventional cash. Although the quantity of bitcoin is restricted to 21 million, demand and supply factors play a role because it is one of the most recognized cryptos. For example, Litecoin has 84 million most of the supply, whereas Chainlink (Ehtereum-based) has a 1 billion production.
Furthermore, because bitcoin is a digital asset, its price is solely controlled by supply and demand.
· Markets in Transition
Cryptocurrency is a new sector that is gaining a lot of traction while also causing a lot of dissatisfaction among investors. Despite the widespread coverage, this market is still insignificant in comparison to regular currencies and even gold.
This means even little causes, such as a group of people holding huge quantities of cryptocurrencies, may affect the market. Even if they merely sold Bitcoins, it's enough to bring the price down.
Speculation is the lifeblood of the bitcoin market. To profit, investors gambled on whether prices would rise or fall. These speculating bets result in a large inflow of cash or a large outflow of cash, resulting in significant volatility.
· Entirely digital asset
The majority of cryptocurrencies, such as Bitcoin and Ether, are solely digital currencies with no tangible commodities or financial basis. That is to say that their price is solely controlled by supply and demand. In the absence of any other stabilizing department, like government support, a fluctuation in demand or supply might occur for a variety of reasons.
· Technology Advancement
The blockchain and other similar technology that these coins rely on are still in the early stages of development. It's been less than a decade since the idea of Bitcoin was commenced. When an agreement is not verified within the timescale predicted, there is a scalable issue, which causes abrupt downward pressure.
· Investors on the Brink
This market is not like real estate or the share market, is not seen to require knowledge. Hence, it is largely part-timers who invest in it. They arrive with the expectation of immediate riches, so when it does not materialize, they feel frustrated and go. Volatility is also a result of this frequent participation and withdrawal.
Today, there are indicators that volatile cryptocurrency market volatility is leveling out. Investment firms, including trading organizations, are more confident in the asset class, and the derivatives market for cryptocurrencies is taking shape as part of the larger crypto market environment's growth and advancement.
It's still unclear if crypto volatility will ultimately follow the same trends as traditional assets. However, as the asset class matures, it will likely continue to display enormous volatility on a regular basis until it hits full maturation at some stage in the future.
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