Why is the cryptocurrency market so volatile?
As of December 2020, Bitcoin was trading around $ 20,000 (around Rs. 14.85 lakh). In January of this year, he crossed $ 40,000 (around Rs. 29.70 lakh). Continuing its bull run, it hit an all-time high of $ 65,000 (around Rs. 48.27 lakh) in April. Then in May it crashed and throughout June it stayed below $ 30,000 (around Rs. 22.28 lakh). The coin started rallying again around July 20 and topped $ 45,000 (around Rs. 33.42 lakh) last week for the first time in nearly three months. Likewise, most of the other popular cryptocurrency coins have performed over the past few months. While this has been a boon for some, others may also have lost some of their investments due to the high volatility in the cryptocurrency market.
The most troubling question for the majority of investors is: why is cryptocurrency so volatile? The cryptocurrency market has been volatile from the start, but the last few months have been particularly turbulent. A few factors determine the trajectory of this market.
Cryptocurrency is still an emerging market, which is rapidly gaining popularity and quickly fueling investor disenchantment. Despite all the media attention, this market is still tiny compared to traditional currencies, even gold. This means that even smaller forces – a group of people holding large amounts of crypto coins – can influence trade. Even if they only sold Bitcoins, that would be enough to crash the whole market.
The cryptocurrency market thrives on speculation. Investors bet that prices would rise or fall to make a profit. These speculative bets cause a sudden inflow of money or a sudden outflow, resulting in high volatility.
Purely digital asset
Most cryptocurrencies, including Bitcoin and Ether, are purely digital assets with no physical or monetary support. Which means that their price is entirely determined by the laws of supply and demand. In the absence of any other stabilizing factor, such as government support, a number of reasons can cause demand or supply to fluctuate.
The blockchain or other alternative technologies on which these coins operate are still evolving. It was only a decade since the idea of ââBitcoin was first proposed. There’s the scalability issue, when a smart contract isn’t validated on schedule, creating sudden downward pressure.
Unlike real estate or the stock market, this market is not seen as requiring expertise. So most part-time employees invest in it. They come with the hope of making quick wins, but sometimes when that doesn’t happen, they lose patience and walk away. This frequent involvement and withdrawal also leads to volatility.