Why is Crypto Market so Volatile?

crypto-market-volatility

We are affiliated with several companies, if you opt to purchase a product we may get a commission at no additional cost to you.

With a decade of exponential growth, people are wondering what the future holds for the bitcoin industry. Price rises were seen as huge swings by critics who question the future viability of cryptocurrencies. The volatile nature of the crypto market is still a question that is raising concern about the crypto market. Let’s find out the answer to the question “Why is crypto market so volatile?”

The rise and fall phase

The year 2017 was a defining moment for crypto market. Bitcoin, the world’s first and biggest cryptocurrency by market capitalization, saw an exponential increase in value from $750 in January to over $19,000 in mid-December. The public watched as the coin acquired amazing percentages in a matter of hours throughout the year. True, it faltered at times, but ask anybody who hopped on the bandwagon that year, and they would tell you they were convinced that Bitcoin investment would secure them lifelong prosperity.

In 2018, the bubble burst with a vengeance. By the end of the year, the market value of all cryptocurrencies had plummeted to $100 billion from an all-time high of $813 billion, a 90 percent decline in coin prices.

A number of factors contributed to the rise and fall of Bitcoin, including herd behavior, blind speculation, and people who didn’t know what they were doing. Experts have been trying to find a way to explain away this sudden crash ever since. In recent years, the crypto world has done a great job of getting back on its feet. However, even though the “Stablecoin” movement has spread to Wall Street, the crypto market is still much more volatile than other assets.

Volatility Index

There are many types of asset volatility in general finance. It is how much the value of an asset changes over time. Gold and government bonds have minimal volatility, but cryptocurrencies have tremendous volatility. Volatility is crucial for investors and traders to understand since it illustrates how hazardous something might be. Investing in crypto assets has the potential to change your life, but you have to admit that you might lose a lot of money.

The Volatility Index measures volatility in conventional markets, but since the crypto market sector is still in its early phases, it has yet to receive an appropriate instrument. However, you don’t need an “index” to realize that on a pretty calm day, the value of cryptocurrencies might fluctuate more than tenfold vs the US dollar. Here are some of the primary causes of this volatility.

Crypto Market is still in an emerging phase

The cryptocurrency market is still insignificant in comparison to conventional trade assets like gold and the US stock market. An investor selling $500 million in gold has minimal impact on world gold prices, but convert it to Bitcoin, and you get a significant price fluctuation. Market manipulation is common in cryptocurrency markets since it just takes a few big orders to cause prices to skyrocket or plummet. Frequent harmful action causes alarm, which leads to even greater instability.

Crypto Market is unregulated

Because the crypto market lacks authoritative bodies such as governments or banks to push coin use, the value of a currency depends on how many people believe in it. News stories about forthcoming restrictions, hacking problems, or harsh comments from ostensibly influential tech leaders might cause mass selling of coins, resulting in quickly declining values.

On the other side, overly positive news may cause the value to skyrocket, resulting in price bubbles.

Buy and sell behavior

By late 2018, the majority of the more prominent brokerage companies had begun to prohibit cryptocurrency trading. This action, understandably, drove prospective buy-and-hold investors away from the market. Many cryptocurrency investors are still purchasing coins intending to sell them speculatively in the near future. Few investors desire to “store wealth” in coins whose values fluctuate by 10% or more on a daily basis. 

Lessor no entry barrier

According to estimates, the typical bitcoin investor has less education and experience than the typical stock market investor. In contrast to traditional markets such as stock exchanges and real estate, the entrance barriers to cryptocurrency trading and investment are almost non-existent. It just needs a few dollars and internet access to get started trading right now. Crypto traders often act without hesitation in circumstances where experienced traders may sit back and wait.

crypto-market
Crypto market volatility

Big money stays away

A lack of rules and exchange-traded funds considerably lowers institutional interest in cryptocurrency. The crypto market becomes less stable when institutional “big money” stays away. Everyone wants excellent returns, but few are ready to risk their hard-earned money.

How does volatile nature benefit?

Though bitcoin volatility raises questions about their use as money, it may also give them an edge over other assets. Cryptocurrencies are non-correlated, making them an excellent alternative investment for a balanced portfolio. Currency, stocks, or any other asset class are not closely associated with cryptocurrency prices. Investors seeking risk diversification outside of established asset classes might explore cryptocurrency as an alternative investment. When the US poured $2.3 trillion into its economy in 2020 to battle the Coronavirus outbreak, it became clear that cryptocurrencies might be used to hedge against future fiat currency inflation. So we can clearly see that why the cryptocurrency is so volatile gets a different angle here.

The truth is, cryptocurrencies are still in their infancy, and their value is continually changing. No one understands a cryptocurrency’s actual worth; thus, prices will continue to fluctuate until its real-world uses are clearer. While their volatility isn’t as awful as some claim, it will take time for the markets to adapt and represent these digital assets’ genuine worth.  The full worth and applicability will likely become understood over time, reducing price volatility. As a result of the reduced volatility, cryptocurrencies will be more usable as currencies and digital assets in the real world. Now you know why cryptocurrency is so volatile and how this volatile nature even benefits investors.