Investing in cryptocurrencies has always been a high-risk, high-return affair. And this has simultaneously attracted/frightened away potential investors. In this article, you will get to know if cryptocurrency volatile is a myth or reality.
Their exceptional rates of return have minted millionaires overnight but have also resulted in trillions of market capitalization being wiped out in moments.
So in a nutshell, the answer is yes.
Cryptocurrencies can either appreciate or depreciate in value with a little-or-no warning. As we’ve seen from Elon Musk’s blatant manipulation of the crypto market, there is little doubt that cryptocurrencies are extremely volatile.
But why is it that digital currencies that technically do not exist behave the way they do? What drives investors to go all in or leave the market en-masse? All because an eccentric inventor cum billionaire has sent out a few Tweets.
The answer is in fact simpler than one would think:
Why Are Cryptocurrencies Volatile?
- They Are Unregulated and Decentralized
To the layman, cryptocurrencies are something of an enigma.
For starters, you can’t actually hold a unit of Bitcoin (BTC) or Ethereum. Also, they are not issued by any monetary authority but instead can be mined i.e. created by just about anyone.
And finally, cryptocurrencies are traded on a market that is entire unregulated.
In the finance world, stock and money markets are governed by rules and regulations that dictate how traders, investors, and financial institutions conduct themselves.
Making trades based on inside information or market manipulation will draw the attention of regulatory bodies like the SEC and lead to heavy penalties or even jail time.
This is where the crypto market is different – there are basically no rules when it comes to trading. Acting on inside information or spreading false news to manipulate prices are perfectly legal.
There are no laws stipulating how investors and traders are required to act. Should there be a sudden spike in demand for cryptocurrencies, there will not be any government intervention and trading resume as normal.
In a market where prices are totally reliant on investor sentiment and nothing else, it’s only fair to expect a significant amount of volatility.
- Market Uncertainty
If there’s one thing that investors hate, it’s uncertainty.
Bitcoin and other cryptocurrencies occupy something of a grey area. Most governments tolerate its existence but will probably never accept it as a form of legal tender.
Because cryptocurrencies have the potential to allow individuals to transfer huge amounts of funds quickly and with relative anonymity – this has naturally raised some eyebrows.
The lack of regulation and supposed anonymity has made cryptos popular with criminals and individuals on the fringes of society. Take these two instances for example:
- Bitcoin was and still is the medium of exchange of choice on the deep web – an unindexed portion of the internet where sex, drugs, weapons, and just about anything can be bought and sold.
- Cryptocurrencies are heavily favoured by criminals looking to launder illegal funds. This can be done through the use of fund transfers and cryptocurrency mixers.
It is because of this that authorities often take a dim view of cryptocurrencies. As such there has been a push for increased regulation of the crypto market. Fears of government intervention often lead to an immense amount of market speculation.
Any developments in government legislation will likely lead to a rapid shift in the market as investors try to get ahead of the curve. It is this continual uncertainty that makes cryptocurrencies such a volatile asset.
- Large Currency Holder Risks
Whales are the colloquial term for individuals who hold a large amount of cryptocurrency. As of 2017, it is estimated that 1000 people own about 40% of all the Bitcoin mined.
With such an immense amount of cryptocurrency in the hands of so few individuals, many investors are naturally concerned about the effect this may have on the market.
If a whale suddenly decides to flood the market with Bitcoin, it would likely result in an extremely drastic shift in BTC prices. The effects of this price movement could be disastrous for hundreds of thousands of investors.
Thus crypto investors are naturally extremely concerned should there be a sudden increase in supply of crypto. And many would not hesitate to exit the market at just the slightest whiff of trouble.
- Bitcoin As a Store of Value
Bitcoin on occasion has been compared with gold as a store of value to hedge against eroding fiat currency values. With its fixed supply and decentralized nature, it’s easy to see why some have even called Bitcoin digital gold.
This is something of a double-edged sword for Bitcoin. A negative outlook for fiat currencies may lead to investors allocating more of their funds into cryptos. This drives up the price of cryptocurrencies.
On the other hand, increased confidence in fiat currencies leads to an exodus of investors from the market. And this in turn causes prices to fall accordingly. Hence contributing to rising market volatility for cryptocurrencies. What gives a cryptocurrency value? Read more here.
Cryptocurrencies are most definitely volatile assets. However, this state of affairs is unlikely to last forever. As the market matures and confidence increases, we may even see a gradual stabilization in prices.