Volatility is simply the degree of variation of a trading price over time. It indicates the amount of uncertainty about the size of changes in an asset's value. The higher an asset’s spread of values, the higher the volatility of it.
The cryptocurrency market has been volatile ever since its inception, but the last couple of years has been a particularly wild ride for millions of investors all over the world. Many have made millions on the big upswings (a.k.a Pump or Bull Run), and yet many have lost large and small investments in the bursting bubbles and sudden market downturns (a.k.a Dump or Bear Market).
This is the reason marketing specialists should know how to promote cryptocurrency brands in the periods of high volatility and investor uncertainty. Still, crypto volatility is what attracts industry investors and ensures the growth of the market.
So why are cryptocurrencies so volatile? Here are the main reasons that the price of Bitcoin and other alt coins are so unpredictable.
This is one of the biggest drivers of volatility in the cryptocurrency market. Cryptocurrency trading involves speculating on price movements. Speculation involves investors guessing that the price of different cryptocurrencies will go up or down using previous price movements. If you can pick when the price of Bitcoin or XRP will take a hike and buy right before it does, you can rake it in. Likewise, if you can short sell a cryptocurrency right before it crashes, you can make profit too. Many traders are constantly trying to guess the up and down swings of the cryptocurrency market. These speculations cause even more volatility in an already unstable market.
Speculators and traders alike are always on the lookout for any big news that will lead them into a profit or loss. The launch of a new cryptocurrency with unique features turns the attention of investors to it. Whatever action they take towards this news adds to the volatility of the market.
Bad news shakes the world and the crypto market is not left out. When there's news of a government regulation or political statement, it affects the price of cryptocurrencies. An example is the Covid19 pandemic. It caused the recent crash and rise in the price of Bitcoin and alt coins.
Cryptocurrency is still an Emerging Market:
The cryptocurrency market is only worth around $267 billion. That’s a loose change compared to the total value of the gold market and the United States stock market. This relatively small market size means that smaller forces can have a larger effect on price. If a group of investors decide to sell $500 million in gold, it would barely create a ripple in the price of gold. If the same happened to Bitcoin, it would be enough to destabilize the whole market and crash the price for a very long time.
Cryptocurrencies are Purely Digital:
This point explains itself. It is also the reason why the world does not see Bitcoin and alt coins (except stable coins) as a store of value against Fiat currency. An example of a Stable Coin is Bitfxt's BPY. Cryptocurrencies are not backed by any physical currency or asset. This means that the market is controlled by the laws of supply and demand. The number of investors buying any currency now determines the rise or fall in price.
Whenever there's a recent security breach that puts the funds or personal information of users at risk of being lost, it has a way of affecting the market. There is usually a surge of withdrawals and sell orders which plunges the market into a dip.
All these factors together, bring about irregularities in cryptocurrency prices. Only smart and skilled traders are able to utilize these changes to their benefit and close the day with some profit.
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