Investors are becoming more interested in cryptocurrencies, but others are staying away due to the extreme price volatility. For instance, Bit Index AI price in October ranged between $900 on October 3 and $1560 on October 17; this represents a variance of roughly 14%. Let’s investigate the reasons behind cryptocurrency volatility.
Stage of Price Discovery
Cryptocurrencies are no different from other innovative ideas in that they require time to mature and gain acceptance. It is still early in the price discovery process since the investment vehicle, the market, and investors/speculators are all still getting their bearings.
However, as an investment market, cryptocurrencies are not as widely acknowledged as more established assets like gold or stock, despite their recent rise to recognition (or notoriety) on a worldwide scale. Market maturity and rising acceptability go in hand. As a result, when Tesla declared that cryptocurrencies would not be taken as a payment, the Bitcoin price fell sharply.
However, Dogecoin’s value increased after Elon Musk typed “Doge” in a single tweet. Similar to how share prices tend to increase when a famous investor purchases stock in a certain business, such influential events or personalities can increase volatility.
Trading is now quite speculative due to the absence of regulations and awareness.
Absence of a controlling body
Cryptos are, by their very essence, not regulated by any organization in the conventional sense as fiat money, stocks, or bonds are, in contrast to other investment vehicles that do have some type of regulating or controlling bodies. As of right presently, there is no legislative structure for cryptocurrencies in India. Investors might be drawn in or turned off by anonymity.
More investors will be aware of the elements affecting cryptocurrencies’ movement as they become more widely used and acknowledged. Until then, a large portion of the volatility is speculative as investors purchase and sell. Even those who are considering cryptocurrencies for the long term do so because they think the asset class will become more popular. For instance, Tesla’s Musk clarified that he held Dogecoin since many SpaceX and Tesla workers do as well.
“Many young individuals are investing in cryptocurrencies. Their goal is to invest fast and make a profit. As a result, when they suffer a significant loss, they frequently leave the market, which increases market volatility.
One of the investors, who have been making monthly cryptocurrency investments since 2016, says: “My worst loss to date was Rs 89,000, and my highest profit was 1/4 of that. But we must remember that the volatility (of cryptocurrencies) sets them apart from other types of investments,” adds analysts.
“A few days ago, the investment increased to Rs. 1 lakh, but after a short period of time, it returned to Rs. 40,000”. The 29-year-old senior engineer and financial analyst, who works for a firm, claims to have seen this type of circumstance several times. These kinds of circumstances are very popular in the volatile market. You never know when you will notice the high profit and when it will become an exact opposite.
Major holdings and limited supply
Some cryptocurrencies, like Bitcoin, have a finite supply in contrast to traditional money. Despite the fact that there are only 21 bitcoins in existence, supply and demand dynamics still persist. For instance, the Ethereum-based Chainlink has a limitation of 1, but LTC has an 84 million component output. Additionally, because cryptocurrencies are digital assets, the laws of demand and supply alone determine their price. For example, if the demand is high and the supply is low then the price of BTC will automatically increase.
Due to the restricted supply, certain entities possess significant amounts of cryptocurrency and may thus affect the movement and decline of the crypto markets by buying or selling additional cryptocurrency. The entire volatility is increased by this, claims experts of the trustpedia.io/dictionary/c/capital-gains-tax-cgt/.
It is true that cryptocurrency market is more erratic than conventional markets. However, the danger of volatility may be compensated with substantial gains (returns). Turbulence is not the adversary in that sense, experts claim that because the profits can be significant, volatility is not a major problem. If you know the right trading strategy and invest only 5% of your total portfolio in crypto then you can easily reduce the risk of loss.
“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.” – Jeff Bezos.