The 2018 market crisis taught many Cryptocurrency Volatility investors a painful lesson about the tremendous volatility of cryptocurrencies. True, the cryptocurrency market has been turbulent since its inception, but the past two years have been exceptionally tumultuous, with individuals winning millions on major upswings and losing practically all of their investments on abrupt market downturns. During this time, the price of bitcoin and other cryptocurrencies fluctuated dramatically from day to day, leading many to infer that cryptocurrencies are a highly volatile market fraught with speculation and uncertainty.
Bitcoin’s price increased from $700 in January 2017 to almost $20,000 in December 2017. However, by February 2018, the price of bitcoin had risen to $6,200. Like a domino effect, the values of other crypto assets such as ethereum and litecoin plummeted. Fast forward to 2019, and bitcoin’s price seems to have rebounded, even breaking the $10,000 barrier in June. Still, the volatility remains, and bitcoin is now trading at $9,499 at the time of writing.
What causes these irregular price changes, and what trading possibilities can they give for both novice and experienced investors? Understanding bitcoin volatility may help you become a more successful trader. CoinFalcon delves into this critical market idea and how it is an essential component of the Cryptocurrency Volatility market.
What Exactly Is Volatility?
Volatility is a statistical measure of an asset’s price dispersion in conventional finance. In its most basic form, it explains how much an asset’s price swings over time. A volatile investment is one whose values fluctuate dramatically up or down daily, as is the situation with cryptocurrency trading.
What Causes the Volatility in the Cryptocurrency Volatility Market?
Several factors contribute to this asset class’s extremely volatile and unpredictable environment. These are some examples:
The cryptocurrency industry is still in its early stages.
Cryptocurrencies have received a great deal of media attention over the years. But the market is still small in comparison to gold bullion and fiat currencies. Even at its height, the cryptocurrency market was only worth around $800 billion. Which is little compared to the overall value of the gold market, which is over $7.5 trillion, and the US stock market, which is approximately $28 trillion. This implies that lesser variables may have a greater impact on Cryptocurrency Volatility prices. If an institutional investor chose to sell $300 million in gold, the price of gold would scarcely move, yet If the same thing occurred to bitcoin or ethereum, that amount may be enough to upset the whole market and cause the price to plummet.
Bitcoin is not a commodity.
Most cryptocurrencies, such as bitcoin and litecoin, are solely digital assets that are not backed by any actual commodity or money. This implies that their price is determined by supply and demand. However, since the supply of certain cryptocurrencies, such as bitcoin, is fixed, the price is determined by how many people want to acquire bitcoin right now. Furthermore, since there is no real object to support their worth or governments to mandate their usage as a currency, the value of cryptocurrencies is dependent on trust. Unfortunately, this confidence may be rather fickle, and if individuals no longer feel that this value will hold or increase. They will likely sell, lowering the price and convincing others to dump their crypto assets as well.
A scarcity of institutional capital
While it is true that certain remarkable hedge funds, venture capital firms, and high net-worth individuals are great fans of cryptocurrencies, most institutional investors are still sitting on the sidelines with their substantial resources. Institutional capital may take numerous forms, such as a mutual fund investing for the long term on behalf of its investors or a big enough trading desk with the ability to increase efficiency and reduce market volatility. However, at the time of writing, there is little movement behind crypto ETFs and mutual funds.
One explanation for this is that, in contrast to traditional sectors like real estate or the stock market, the entrance barriers to cryptocurrency trading and investment are not as high. You do not need a trading license or a minimum capital amount to invest. To begin trading right away, all you need is a few dollars and an internet connection. This may appeal to individual and amateur traders throughout the globe, but not to institutional investors.
You are already aware that the Cryptocurrency Volatility market is plagued by a great deal of speculation, and that media hype has a significant effect on where the prices go. Investors and speculators are continuously scanning the news for the next major news event that will either accelerate or collapse the market. When anything does emerge, it becomes a race to purchase or sell, and those who can respond quickly benefit the most. While those who are sluggish likely to lose the most. This frenzy generated by media tales simply adds to market instability. Furthermore, many of these cryptocurrency investors and fans receive their news from untrustworthy sources.
The cryptocurrency industry is mainly uncontrolled because of the complexity and difficulties of regulating an open-source and decentralized technology. Cryptocurrency has become a global phenomenon, and many governments are trying all out to crack down on the business. But regulation is still in its early stages. With such lax regulation comes an invasion of unscrupulous actors capable of manipulating markets, introducing volatility, and discouraging institutional investment. These unscrupulous players might place big orders to manipulate the market and generate dramatic volatility.
There have been multiple stories about organizations actively attempting to disrupt the cryptocurrency market. Such as a concerted pump-and-dump plan and Cryptocurrency Volatility exchanges manipulating trade volume. Given how rapidly news and feelings can impact the bitcoin market, these stories will simply cause fear. Leading to even more turmoil and volatility.
All of these variables work together to drive the price of cryptocurrencies in apparently random ways and at seemingly unpredictable periods. Experts have often been proved to be incorrect about forecasting the crypto market, and this is unlikely to change very soon. Understanding the market’s volatility. On the other hand, may help you define your risk tolerance and make educated cryptocurrency investing choices.
Recognizing the Relationship Between Volatility and Risk
Volatility is an important term to grasp in the bitcoin world since it assesses risk. Understanding your risk tolerance as a bitcoin trader or investor is always the first step before investing in any kind of investment. Of course, the degree of risk that you choose to accept is directly proportional to the possible profits. Simply stated, a higher-risk investment has a higher possibility of producing larger returns. Whilst a lower risk investment has a lower rate of return.