Advertisement

Why are cryptocurrencies so volatile?

Why are cryptocurrencies so volatile?

If you ask a typical bitcoin critic to give you some disadvantages of the cryptocurrency or why they think it's an overhyped bubble; I'm willing to bet you're going to get slammed with "it's volatile" or some other phrase revolving around the currency's volatility. While this may be true, it is not necessarily a disadvantage for traders; every trader will exploit the volatility of whatever asset class they're trading.

However, the volatility argument usually borders around the mainstream and institutional adoption of cryptocurrencies. In some other cases, it may come up when it might be suggested to have the potential to replace traditional fiat currencies. Either way, the volatility topic remains.

So what makes cryptocurrencies so volatile? Here are a few suggested reasons

NEWS EVENTS: It's no question today that the media is one of the most potent tools in global activities; its influence undoubtedly cuts across many industries. In the same vein, the price of any cryptocurrency is mostly influenced by the media. Once there is a perceived negative narrative attached to bitcoin, traders have often experienced a pullback.

An outstanding example was the October 2013 Silk road saga; the popular dark web had been discovered for its hideous activities by the FBI. Damaging for cryptocurrencies was the wide reports that Silk Road dealt widely in cryptocurrencies like many other dark webs. This caused a massive dip in the price of bitcoin at that point.

While positive news such as new institutional investors, crime-fighting, and new regulations may also bolster bitcoin's price, the perceived media narrative is undoubtedly a massive factor in bitcoin volatility.

SECURITY BREACH: Hypothetically, the distributed ledger technology remains ironclad and tightly secure. However, from time to time, hackers and fraudsters have often found ways to manipulate exchanges, individuals, and companies using methods ranging from phishing, 51% attacks, Sybil attacks, and wallet key theft.

Unfortunately, these attacks pose significant threats to the volatility of any cryptocurrency. This is usually more significant when exchanges are targeted. Not only does it scare traders away, but the quick liquidation by long term investors can also cause a massive dip in the price of a cryptocurrency.

INSTITUTIONAL INVESTORS AND LARGE CURRENCY HOLDERS: The price of any asset is controlled by how much value is invested in that asset. Likewise, a large influx or outflux of institutional investors and individuals holding massive amounts of a cryptocurrency can make or mar the coin.

If, at any point, a good number of institutional investors decide to trust bitcoin, the price is bound to go up. This was seen in December 2017, as it was widely suggested that many institutional investors chose to adopt bitcoin. Between that period and the next year, bitcoin experienced up to 8% volatility, mostly because of institutional investors.

BITCOIN IS RELATIVELY NEW: As difficult as it may be to admit, cryptocurrencies are new, and they have an uncertain future. While many experts may positively or negatively predict cryptocurrencies, we're still at the mercy of time to find out what the future holds. This singular fact is reflective of the price of bitcoin and other cryptocurrencies.

Volatility is not necessarily a terrible thing; however, if crypto will ever compete with fiat currencies, it will always be a bordering issue. In the next couple of years, we're definitely going to find out how this would play out for cryptocurrency lovers.

You can share this post!

Advertisement