WHAT CAUSES PRICE FLUCTUATION IN CRYPTOCURRENCY
Cryptocurrencies have gained wide acceptance and are in active use by members of the global community. It has proven to be a good source of investment because of its high chances of skyrocketing in value within a short period. Although, just as it appreciates in leaps, so does it depreciate.
The suddenness and unpredictability of the value of cryptocurrencies are a constant source of concern to investors. No one would love to see his money go down the drain simply because of a drop in the value of a cryptocurrency. Thus, it is no wonder that investors may often inquire about what makes the price of cryptocurrencies rise and fall?
It is necessary investors find this out to discern when buying or selling may be safe to save themselves from being caught unawares. The knowledge of the volatility of cryptocurrencies may also help potential investors gauge their level of readiness to invest. These are stating just a few reasons for the interest in the causes of price fluctuation in the cryptocurrency market.
Despite the risks involved in trading in cryptocurrencies, there remains a high interest and a sustainable future. It could be attributed to cryptocurrency transactions being anonymous i.e. they have no connection with real-world identities. It could also be a result of the advantage of having to transfer money without friction, a benefit that comes from the use of the internet. The internet makes the use of cryptocurrencies fast and global.
Regardless, the volatile nature of cryptocurrencies remains undisputed. An example is a single bitcoin, traded at $1,000 at the start of 2017. By the following year, it was worth almost $20,000. By mid-year, it had dropped to around $5,000.
Also, in December 2020, it was trading around $20,000. By January 2021, it had moved up to $40,000 and even $65,000 by April. However, from May until June, it stayed below $30,000. Then, by July 20, it had surpassed $45,000.
This goes to prove that the future value of cryptocurrencies cannot be predicted hence, it becomes crucial to know what may affect the trading value. It will help guide all who may be interested in trading in cryptos. Here are a few causes of the volatility of cryptocurrencies:
- SPECULATIONS
The thriving nature of cryptocurrencies arises from speculations of investors. They make speculative bets that the prices would go up or down to make profits. The speculations lead to high volatility because they either cause a sudden influx of money or a sudden outgo.
- ARISING MARKET
The cryptocurrency market, despite its strong media attention, remains an emerging market still gaining rapid popularity. When compared to traditional currencies, or gold, it is still a minuscule market. The effect is that smaller forces can influence the trade because they hold large amounts of crypto coins. If they, for instance, sell only Bitcoins, it would be sufficient to crash the whole market.
- DIGITAL ASSET
The nature of most cryptocurrencies, Bitcoin and Ether inclusive, is that they are purely digital assets. It means they do not have any physical commodity or currency to back them up. Hence, their prices are determined by the laws of supply and demand. So, where there are no stabilizing factors such as backing government regulation, a fluctuation in demand and supply may be caused by any number of reasons.
Also, most cryptocurrencies have a limited supply making them scarce. High demand for them equals an increase in the value. The consequence is a price increase.
- KIND OF INVESTORS
Investors in cryptocurrencies are mostly part-timers because the market is not so much in need of expertise like real estate or the stock market. These delicate investors easily lose patience when they do not seem to be making quick gains from the market and may end up withdrawing from it. Cryptocurrencies prices may fluctuate as an effect of the frequent involvement and withdrawal.
- EVOLVING TECHNOLOGIES
The proposal of the idea behind most cryptocurrencies is still recent, the market is a recent development. The coins function on a blockchain or some other alternative technologies which are still evolving. This poses a scalability problem i.e. when a smart contract is not made valid within the expected timeframe. The effect of this is a creation of sudden downward pressure.
Conclusively, due to the volatility of the prices of cryptocurrencies, investors should not invest in them at the expense of other financial goals. A smart move will be to allocate just a small percentage of the overall assets to any cryptocurrency. For example, just like any other speculative investment, it is recommended that cryptocurrency investments should be kept to less than 5% of the investor’s portfolio.
The reason for such is that it is not possible to know if crypto will continue to rise in value or fall into obscurity.
