Whenever you sit down to talk about cryptocurrency, one of the most common pieces of advice or remarks you’ll hear is that the market is extremely volatile. And why not, given that the assertion is virtually entirely true.
There is no doubt that this sector has been labelled as a roller coaster ride since the beginning of the Bitcoin Era and the advent of other cryptocurrencies. The cryptocurrency has earned this moniker due to its sharp ups and downs. What, though, is the cause of its erratic behavior? What factors are responsible for the cryptocurrency’s ups and downs? Will there ever be a point of balance in this industry? If you are also interested in crypto trading, you just need to click at this link.
In this article, we will discuss everything in detail to find answers to these questions.
Why is Cryptocurrency so Volatile?
Cause of Volatility
It’s crucial to first comprehend the nature of volatility before examining the source.
Bitcoin’s value began at $20,000 in December 2020, and by January, it had risen to about $40,000. The price increased to $65,000 in April. Then, in June, the price was reduced to $30,000 for the first time. Then, by July, the price had risen to $45,000 once more. However, various factors contribute to these ups and downs.
In-Growth Market
It’s worth noting that, despite its widespread publicity on television and social media, Bitcoin remains a minor player in comparison to fiat and gold. The greatest point reached by the bitcoin market was about $2 trillion. Bitcoin still has a long road to cover compared to gold, which is worth $7,9 trillion, and even when compared to the US stock market. When it comes to price, it’s critical to remember that even the tiniest of changes can have a significant impact when the scale is small.
The market is almost impossible to get out of compared to the gold market. The market will hardly exhibit movement symptoms even if a group of investors decides to sell gold worth $400-$500 million. Take a look at what’s going on in the bitcoin market. We already know the consequence since the market cannot absorb such a loss at this moment, and as a result, it will plummet if this occurs. On the other hand, the crypto market is still growing, and there are still prospects for someone to come up with a new idea.
Digital Currency
Almost all cryptocurrencies are virtual currencies that have no physical foundation. This has a huge impact because pricing depends on supply and demand. When it comes to bitcoin, the price is purely determined by the number of people interested in purchasing it, as bitcoin’s price is relatively predictable. The pricing is set based on the quantity available. There is no such thing as a backup that can cover the value and no such authority that can mandate a payment method.
This implies that bitcoin’s value is determined by faith. It can go up or down in a matter of seconds, and no one can control it. Those who do not believe that the price will remain stable will eventually sell their bitcoins. As a result, there is a disruption in the market, which results in significant market fluctuations. Due to recent market changes, even people who had no intention of selling their coins have decided. This results in a significant reduction in pricing. It is also possible for the inverse to occur. There could be a significant increase in pricing, and more people could enter the cycle, causing it to worsen.
Market Prediction
Market prediction is one of the most important factors in cryptocurrency’s volatility. Investors can bet on whether the market will rise or fall simply by selling and buying. The entire market volatility is based on traders’ predictions and investing to make more money. You can easily benefit from forecasting when the market will fly up and buy the coins before it happens. Similarly, you might benefit by selling them just as the market is about to decline.
Short selling is a common practice where a trader borrows a stock, sells it, and then buys it back to repay the lender. Short sellers make forecasts and value the shares they are trading based on those assumptions. Many cryptocurrency speculators constantly predict the ups and downs of the market.
Read: 4 advantages and disadvantages of adopting cryptocurrency as our primary currency exchange
