August 10, 2022

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Cryptocurrency is a relatively new asset class that is highly volatile. There are several reasons...

Cryptocurrency is a relatively new asset class that is highly volatile. There are several reasons why the cryptocurrency market is so volatile.

About Cryptocurrency

Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Basic CryptoCurrency (such as Bitcoin) is not issued by any government; it is produced by people and businesses running computers all around the world using software that solves mathematical problems!

Cryptocurrencies can be converted into real currencies (commonly known as fiat) like the dollar or Euro through various foreign exchange services like www.currencyfair.com​. You can also use alternative methods such as BitCoin Debit Card which works with Visa/MasterCard compatible ATMs & POS systems globally for instant withdrawals & deposits. Blockchain and cryptocurrency have a lot in common. What’s the reason? It is due to blockchain technology that cryptocurrency has an undisputed position in regard to security. Before we look at the benefits of these technologies and their advantages, let’s have an overview of blockchain technology. Like the name implies it is a network of blocks in which blocks store data. Since cryptocurrency is a transfer of digital currency among 2 parties, details of the transaction, i.e., the date as well as the amount, time, and date is stored in a ledger of digital data or blockchain. Every time a transaction is completed regardless of the location you are in the world, a record of the transaction is added to the chain and the process continues. If you want to learn more about the process you can visit here.

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History of cryptocurrencies

Source: unsplash.com

The first Cryptocurrency was Bitcoin, which started in 2009. However, the idea of cryptographic proof used to generate currency without a central authority existed even before then. The use of computational techniques to limit or avoid spending money more than once was outlined by David Chaum in 1982. Around 1995 he also founded DigiCash, an electronic cash company that offered anonymous transactions based on cryptographic proof instead of trust. Unfortunately, this company went bankrupt due to the lack of scalable digital currencies being available during that time. As a result, many current cryptocurrencies are attempting to fill this void using improved protocols and features such as anonymity & faster transaction times! ​

Much like the dot com boom during the late 1990s, there has been an extraordinary amount of wealth created in a very short period of time in this space. Many people during that era were struggling with their J-O-B, but were able to make a good income from stock investing and affiliate marketing from home! A lot of the same dynamics are true in Cryptocurrencies today! If you have been thinking about getting into Cryptocurrencies this is my no means financial advice or anything like that ​ just merely sharing some knowledge I have obtained through trial & error, don’t take everything you read online as gospel – do your research!!

So let’s talk about why the market is so volatile

Source: currency.com

The main reason for the instability in cryptos is their novelty. New concepts require time to become settled and accepted, and this is for cryptos. The asset class, the market as well as investors/speculators are still finding their feet and so it is still the initial stages of price discovery.

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The rise of cryptos has brought them global recognition (or notoriety) over the past few years, however, as an asset class, they’re not as popular as traditional investments such as gold or equity. A growing acceptance and a maturing that the markets have to go with each other. This is the reason why, when Tesla stated that cryptocurrency would no longer be accepted as a method to pay, the price of Bitcoin fell. However, when Tesla chief Elon Musk wrote “Doge” in his tweet The value of Dogecoin was boosted.

Influencing events or people can increase the risk of instability, in the same way when an investor of the spotlight purchases shares of a specific company, and prices for those shares are likely to rise.

First, the cryptocurrency market is still relatively small compared to other markets. This means that it is less liquid and more susceptible to price swings.
Second, the cryptocurrency market is unregulated. This makes it more vulnerable to market manipulation which can push prices up or down.

Third, the cryptocurrency market is still mostly dominated by retail investors who have a herd mentality and are highly emotional in nature. This means that they tend to drive prices up quickly during periods of optimism but also drive them down quickly when there are any negative news about the cryptocurrencies.

Fourth, the cryptocurrency market is still quite fragmented. There are over 1,000 different cryptocurrencies and many of them are quite niche. This makes it difficult for investors to accurately assess the risk and potential returns of each investment.

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Finally, the technology underlying cryptocurrencies is still relatively new and evolving. This means that there is a lot of uncertainty about the future of cryptocurrencies and this contributes to volatility in prices.

Source: thestreet.com

All these factors together contribute to the high volatility in cryptocurrency prices. While this may be frustrating for some investors, it also provides opportunities for those who are willing to take on the risk. Over time, as the market matures and becomes more liquid, we should see less volatility in cryptocurrency prices. In the meantime, investors need to be careful and not get carried away by the short-term price movements.

Conclusion

The volatility in cryptocurrency prices is mainly caused by the novelty of the asset class, its unregulated nature, the herd mentality of retail investors, and the uncertainty about the future of cryptocurrencies. While this may be frustrating for some investors, it also provides opportunities for those who are willing to take on the risk. Over time, as the market matures and becomes more liquid, we should see less volatility in cryptocurrency prices. In the meantime, investors need to be careful and not get carried away by the short-term price movements.