Why Cryptocurrencies are so volatile?

If you’re in the cryptocurrency industry or are looking to invest in the market, one of the  advice you’ll receive is – “the market is highly volatile.” That’s because, Bitcoin, or other cryptocurrencies , embodies the term “roller coaster ride,” with its wild fluctuations. It has faced stupendous lows and spectacular highs over the course of a short term.

why is crypto so volatile? What are the factors that govern its prices, and will it ever reach a point of stability?

Cryptocurrency Volatility – What Triggers The Same?

Bitcoin was worth about $20,000 in December 2020. In January, it hit $40,000. In April, it hit a new high of $65,000. This was followed by a June crash below $30,000. Around July 20, the coin surged to $45,000. With such a drastic volatility occurring, there are a few factors that contribute to it

                                               

1. Cryptocurrencies are completely digital in nature:

The vast majority of cryptocurrencies, such as Bitcoin, are entirely digital assets that are not backed by anything physical , such as money or a commodity. This implies that the price of their products is totally determined by the principles of supply and demand.

Because the supply of certain cryptocurrencies, such as Bitcoin, is predetermined and predictable, the price of Bitcoin is determined by how many individuals are interested in purchasing Bitcoin at any one time.

There is no physical object that can be used to support the prices, and there are no governments that can mandate its usage as a form of payment. This indicates that their worth is totally dependent on faith. If individuals no longer feel that the price of Bitcoin will remain or will continue to grow, they will most likely sell their Bitcoin.

Thus, a cycle is formed, with the price rapidly falling as a result of other people selling their goods as well, further lowering the price. The inverse can also occur, causing prices to rise sharply.

2. It’s still an emerging market:

                                                                           

The scale of the cryptocurrency industry is still unknown or undetermined in comparison to fiat currencies(INR, USD, etc.) and gold, despite the extensive media coverage that has been given to cryptocurrencies over the years. The bitcoin market accounted for about $2 trillion in total.

when compared to the whole worth of the gold market, which is $7.9 trillion and the estimated value of the stock market in the United State and India which is $28trillion & $3.4055 trillion respectively, it still has some way to go to reach that value.

However, the reality that the cryptocurrency industry is still in its early stages means that there are several possibilities to enter the market with a novel and attractive concept.

3. The technology is still in its early stages:

Blockchain and other competing crypto technologies are still in their beginning stage.

Given that it has only been a decade since the concept of cryptography-based decentralised currencies was first revealed in the Bitcoin whitepaper, it will be some time before the market reaches maturity. Despite this, a large number of businesses like Microsoft, PayPal, Etsy, and more have already embraced blockchain technology and are proactively utilizing it.

4. News around the Globe:

Geopolitical events and assertion by government authorities that bitcoin is likely to be controlled are examples of news events that cause concern among bitcoin user and affect its price. There were a number of unscrupulous actors among Bitcoin's early users, resulting in headline-grabbing news articles that fanned investor fear. 

                                                                      

Crypto going down comes, causes the value of bitcoin and alts to fall, a short while after these news events, however bitcoin-friendly investor interpreted such occurrences as proof that the market was maturing, resulting in a significant increase in the value of bitcoin relatives to the dollar.

5. Market speculation:

Speculation is one of the most important factors contributing to the volatility of the bitcoin market. This includes investors placing bets on whether the price of various cryptocurrencies will rise or fall by purchasing and selling different cryptocurrencies. According to the cryptocurrency market’s inherent volatility, it is this that attracts speculative traders seeking to earn huge amounts of money by accurately predicting price fluctuations.

Many investors are always attempting to predict the ups and downs of the bitcoin market to gain instant profit, which is extremely difficult. These speculative investments worsen market by causing even greater volatility.