Cryptocurrencies are growing in popularity and acceptance in mainstream monetary transactions. At the same time, their volatility is also increasing. The cryptocurrency market has been volatile since it started, but the last two years have been particularly turbulent. There are many reasons for this. Any trader will need to know how to work around the volatility in order to make their product appealing to their target audience.
What Excites People About Cryptocurrencies
The ability to make a huge amount of money in a short amount of time is what appeals to people about cryptocurrency. Another reason why people are turning to it is privacy. Security is also important. The volatility aspect is what makes cryptocurrency so exciting to investors.
A volatile asset is the only type of asset that can deliver a large sum of returns in a short amount of time. These healthy returns have made cryptocurrency very popular in developing countries such as India. Investors who closely track Bitcoin price in India can buy low and sell high to generate a profit. This trend is creating a new investor class of India’s population.
Cryptocurrency Is Still an Emerging Area of Investment
One of the main reasons for the ongoing volatility of cryptocurrencies is that it is still an emerging industry. Even though Bitcoin and the other coins get a lot of attention from the media, the size of this market is tiny compared to gold or fiat currency. Even at the peak of the cryptocurrency market, its cap was only $800 billion. That’s pocket change compared to the $9.6 trillion gold market cap. The United States’ stock market has about $30 trillion in assets. With a small market, a small group of investors can create a big effect depending on what they do. If an investment group decided to sell $100 million in Bitcoin, the market would destabilize and crash.
It’s All Digital
Bitcoin is a 100% digital asset. It’s not backed by anything. Its price is set by its perceived value. If people want it, they’ll pay for it. Supply and demand controls this market. If not many people want to buy Bitcoin, its price will drop. This can lead to a negative feedback loop or cycle of plunging values.
The Infrastructure Is Under Development
Blockchain is still in its early developmental stages. Although a lot of firms use it, there’s still a long way to go in building the infrastructure. The scalability problem pushes prices of cryptocurrencies lower. On the other hand, some platforms and apps can send values soaring.
Speculators drive the market. They bet on prices. The volatility lures them. Guessing the market just adds to the volatility. This creates a positive feedback loop of chaotic activity.
Good and Bad Press
The media, whether it creates good press or bad press about cryptocurrency, feeds into the speculation and volatility. Investors and speculators are always scouring the internet for tidbits to inform their decision-making processes. They try to do this before the next investor does. They even create algorithms to check news feeds. In many cases, the media publishes a story before it even has a chance to verify whether or not the information is correct. Publishing news based on rumors without any fact-checking only feeds into the volatility of the cryptocurrency market.