Why is the crypto market so volatile?
The term “volatility” refers to fluctuations in the price of an asset. Sometimes the price change becomes too dramatic, with big price swings in a short time. This is called “extreme volatility”.
In this article, we have tried to explain the volatility of the crypto market to help investors make the right choices regarding their investments.
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In the crypto industry, a brief check of past price charts reveals that depressing lows and explosive highs occur at a faster rate in crypto prices.
For example, Bitcoin price rose 125% in 2016 and more than 2000% in 2017. Bitcoin price fell after hitting new all-time highs in 2017. Bitcoin hit two all-time highs again in 2021 , with all records set in November 2021. Since the start of 2022, bitcoin has been trading at lows against other cryptocurrencies.
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What Drives Crypto Price Volatility?
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Cryptocurrency is still a growing industry, with a lot of hype and disillusion among investors. Despite all the media coverage, this market is still trivial compared to gold or traditional currencies. The group of people holding large sums of cryptocurrency can easily influence the market through large sales.
Speculation is the lifeblood of the cryptocurrency industry. To make money, investors bet on falling or rising prices. These speculative bets lead to significant price volatility.
The majority of cryptocurrencies, such as Ether and Bitcoin, are digital assets with no tangible money or commodity backing. This means that their price is evaluated according to the principles of supply and demand. Therefore, any market development can create a gap between supply and demand and influence the price.
Driven by technology
The blockchain and other alternative technologies on which these coins are based are still in the early stages of development. Every time a new technology is introduced or a part is upgraded, the impact on the price of a part is huge.
The crypto market, unlike the stock market or real estate, attracts new investors who want to enter the crypto market to make quick profits. However, when profits are not made, rookies withdraw their funds from the market, which impacts market performance.
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The crypto market is extremely volatile. Therefore, an investor should invest in the crypto market with caution and after doing thorough research. Also, one should invest as much as one can afford to lose. Instead of expecting a certain level of success overnight, one should take a more gradual approach to the cryptocurrency market.
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