Everyone is trying to get their hands on digital currencies in today’s world. Stock market and cryptocurrency trading have been the most attractive options for many people to earn money.
The technology world has given numerous innovations, but cryptocurrency has been one of the most eye-catching innovations. Currencies like Bitcoins, Ethereum, etc., have garnered immense popularity among people.
But, there are many things about these digital currencies that people hate. One of these major things is volatility. The volatility of cryptocurrencies refers to the degree of change in the price or value of the cryptocurrency due to various factors like demand, supply, economic phase, government rules, media coverage, etc.
These coins have high volatility due to various changes in the market. An investor keeps a daily check on the price fluctuations of different coins. There are platforms like https://www.okx.com/markets/prices that give information about the price fluctuations of digital currencies and other relevant news.
What Does High Volatility Imply
Volatility is a crucial index to judge and predict an investor’s success. When there is an unexpected decline in the prices of cryptocurrencies, it will allow investors to purchase more coins.
On the other hand, if the volatility induces the prices to rise, it will lower the volume of investors as they would sell their held cryptocurrencies in the market, making huge profits. Although it turns out to be a favorable movement for many investors, it can create a problem for investors in the long term.
Many people get confused as to why these currencies are so volatile. There are various reasons for the market being so volatile. The following sections cover these reasons in detail, giving insights into the industry.
Top 5 Reasons For The Volatility Of Cryptocurrencies
There can be various direct and indirect reasons for the volatility of the crypto market. But, the following points highlight the five most impactful reasons for the same.
1. Crypto Is A Budding Market For Investors
Many people are still unaware of cryptocurrencies. They have either heard once or never even been introduced to this term. This highlights that cryptocurrency is a new and emerging market. Despite this lack of awareness, there are many people who are regular investors in cryptocurrencies.
But, the number of investors is very small compared with traders in other assets like gold, stocks, etc. When there are a large number of investors, the selling and purchase will not create a massive impact on the prices.
On the other hand, when a relatively small number of investors are trading in a specific asset, their actions of selling and purchasing the asset will stimulate price fluctuations. This fluctuation grows when these investors hold enormous units of the asset. Therefore, due to the emergence of the crypto market, the volatility is significantly high.
2. Lack Of Underlying Asset
The most contributing factor to the high volatility of digital currencies is that they do not have an underlying asset. In other words, it means that the price of the currency is solely dependent on the market demand and supply.
The supply of coins like Bitcoins is permanent or fixed. Therefore, their price completely depends on the demand or the number of people willing to buy them. Therefore, a small change in the supply or demand of any coin can influence the price by a noticeable margin.
Its price is set by the predictions of people. If they believe that the next day or week, the prices will increase, they will buy today and sell it when the prices increase. This sudden change in the position is created by many people, thereby increasing the volatility.
3. Technology In Process
When it comes to cryptocurrency mining, technology is the most crucial aspect. Blockchain technology is a system that integrates and records the transactions of different traders within a few minutes.
This technology can act as a double-edged sword. As it can perform operations quickly, complex activities can delay the process. This can lead to a downward price movement. Solving mathematical problems within a given timeframe is vital in the digital world.
Scalability can cause a price fluctuation in crypto prices. Since the technology for trading is still developing, there are frequent unforeseen changes in price.
4. Speculation & Related Activities
Speculation refers to predicting the upswing or downsizing in the price movement of an asset. Cryptocurrency trading attracts more speculative activities due to its already existing high volatility. This volatility engages people to bet and trade more.
However, speculation acts as a stimulator for the high price fluctuations. When the supply-demand regularly changes, it becomes difficult to predict the prices. Therefore, speculation induces more fluctuations in an already chaotic market.
5. Lack Of Dedicated Investors
It is a proven fact that the investors in cryptocurrencies are not as dedicated towards the trading process as they are in the stock market or other assets. They perceive the crypto market as a place for earning high returns within no time.
This expectation of earning quick gains is not fulfilled every time. Sometimes, the market might crash down suddenly and vice versa. When the conditions are unfavorable for such investors, they change the dynamics by abruptly selling digital coins. This phenomenon marks a sudden movement in price.
Apart from these reasons, the media also plays a big role in determining the market price. It can lead to a positive influence. But, at the same time, it can create a massive difference. For example, when the government imposes restrictions on these currencies, the media will also cover the same. This will lead to a double impact on the prices of various cryptocurrencies.
Technology has undoubtedly provided massive relief to investors. But, there are certain loopholes like abnormal volatility. The reasons mentioned above give an overview of why a person should understand digital currency better and keep a check on price movement. They should keep a check on the price fluctuations to capitalize on favorable market conditions.