3 Reasons Behind Crypto Market’s Volatility
The cryptocurrency market is prone to big fluctuations. Since their inception, digital currencies like Bitcoin and Ethereum have seen wild price swings, often within minutes.
Consequently, many investors are baffled, wondering where and how this volatility possibly originate.
Many traders and investors avoid cryptocurrencies because of market volatility.
The future currency will likely take the form of cryptocurrencies, digital currencies.
These means of payment are fast, secure, and independent of governmental control.
The entire market cap of all crypto was $1.2 trillion at the time of this writing, which represents a reduction of -39% from 2021.
Trading cryptocurrencies requires an in-depth understanding of the technology behind them and the market dynamics influencing their value.
Trading cryptocurrencies may provide substantial profits, but it also carries significant dangers.
Cryptocurrencies are often unpredictable due to their decentralized nature.
The cryptocurrency markets are exceedingly speculative, and there is no well-established regulatory framework for their trading.
This makes cryptocurrency exchange rate volatility greater than traditional asset classes like stocks and bonds.
Depending on one’s perspective, this uncertainty may be both a boon and a bane to one’s investing plan.
If in 2011, you invested $20 and held on until 2017, when Bitcoin was worth $20,000, you would have made a return on your investment that is 1,000 times larger than your original $20 outlay.
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To fully grasp the volatility of cryptocurrencies, it is crucial to comprehend how the supply of cryptocurrencies shifts as more people buy them and as the mining process keeps producing more ones.
Increasing the number of people looking to buy virtual currencies like Bitcoin and Ethereum drives their prices.
Growing demand and a fixed supply (there will only ever be 21 million Bitcoin) drive the price.
This is because there is always more demand than supply; hence prices tend to be high.
However, since more coins will be available, the value of each currency will decline.
This is because more people will want to buy coins, and more will be willing to sell coins.
More firms entering the market means more competition, leading to lower prices.
This means that the value of cryptocurrencies with a high supply is substantially lower than those with a low supply.
One of the reasons why Dogecoin is unlikely ever to be worth $1 is because its value falls if there are more coins available on the market (indicating less demand).
This is not unique to the crypto market but applies to stocks, bonds, and other asset classes.
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One of the key factors contributing to price volatility in cryptocurrencies is the degree of enthusiasm and speculation around them.
There is often an uptick in interest right after a new cryptocurrency is introduced to the market and put into circulation.
Many rushes to buy and sell the new currency, driving its price to unsustainable heights.
As soon as investors start to lose money on the currency and think it’s expensive, the speculative frenzy and the bubble will burst, sending the currency’s value down.
The value of cryptocurrencies is prone to experiencing rapid appreciation followed by a swift depreciation.
Influencers and celebrities may also affect the price of the cryptocurrency.
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One factor dragging down the value of cryptocurrencies is the uncertainty produced by governments worldwide cracking down on cryptocurrency.
For instance, China banned Initial Coin Offerings (ICOs) and temporarily halted trading in several cryptocurrencies in September 2017. As a result, trading was suspended as well.
Due to this, the value of the bitcoin dropped significantly over time.
Many people working in the bitcoin industry are now skeptical that cryptocurrencies can survive in their present form beyond the bear market of 2022.
Others are more gloomy about the future of cryptocurrencies in general, while “crypto enthusiasts” hope that markets will ultimately settle and that cryptocurrencies will continue to acquire value over time.
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Trading in Bitcoin and other cryptocurrencies has the potential for both advantages and disadvantages. Trading is not suitable for everyone. Anyone interested in investing must consult with an expert.