Why Are Cryptocurrency Prices So Volatile?
By TOI Desk Report
June 2, 2023
Update on : June 2, 2023
Cryptocurrency is one of the hottest new trends, with millions of people around the world now investing in and trading these digital assets. They present a unique opportunity for investors, with highly volatile prices leading to major fluctuations in the value of these coins. The Bitcoin price and other cryptocurrencies has been the subject of a lot of media interest, causing both intrigue and concern.
While price changes happen in any financial market, including stocks, few are quite as unpredictable and wild as cryptocurrency. Big price movements have been welcomed by some, with both traders and investors able to profit from the volatility if they make the right moves. However, these price changes have also scared some investors off, as greater risk management is required. In this article, we’ll be looking at why cryptocurrency prices are so volatile and what this means for trading and investing.
What is Cryptocurrency?
Cryptocurrencies started with Bitcoin, which was first launched in 2009 as a way for people to send and receive money without relying on a middleman. Instead of using payment processors or banks, Bitcoin uses a decentralized blockchain to record transaction data, and the way this technology works ensures that no third party is needed.
Anyone can use Bitcoin, and the fact that there’s no middleman helps to reduce costs and also means faster transactions. You can use it to send money anywhere in the world, and it’s relatively simple to start using.
Since Bitcoin was created, many new cryptocurrencies have been created, all offering different features and advantages. All of these digital assets use blockchain technology, even if the type of blockchain and the way they operate might differ.
Reasons for Cryptocurrency Volatility
Although blockchain is the defining characteristic of cryptocurrencies, almost all of these digital assets have another feature in common, they’re all extremely volatile. Here are some of the main reasons for this volatility:
Speculation
People who invest in cryptocurrencies hoping that the value will increase are speculators, as cryptocurrencies themselves have no intrinsic value. Unlike fiat currencies, which are backed by the economic power of nations, and stocks which are based on the value a company creates, cryptocurrency is far less tangible. This means that prices are more prone to major fluctuations, as it’s hard to say what the true value is.
Liquidity
Liquidity is perhaps one of the most important factors when looking at how volatile a market is. More liquidity means more available cash in the market, which leads to fewer price drops when someone sells a large volume of assets. Traditional financial markets typically have a lot more liquidity, as this form of investing is still far more popular. As cryptocurrencies become more popular, liquidity will increase, which could help to reduce volatility.
Regulations
Crypto is still a very new type of asset, and many organizations are still working out how to regulate it. The stock market and other financial markets are subject to regulation, which protects companies and investors and helps to increase the level of trust, leading to lower volatility. On the other hand, many investors in crypto get spooked easily, especially when news of new regulations breaks. Lots of price movements are based on crypto being banned or legalized in a certain country,
New Technology
As cryptocurrency and the technology behind it is still new and developing, this has an impact on the market too. New cryptocurrencies are being continually launched, each bringing new features and opportunities. This also affects the market, with price movements often based on the latest innovations and applications of crypto in the real world.
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