6 Reasons Why Cryptocurrencies Are So Volatile
1 – Lack Of Fundamental Value
Cryptocurrencies have no inherent worth; they don’t earn revenue or return any bonuses. You can't really know if and when they get overbought or under trading. There is no basic information to base expectation or future forecasts. They rely on market sentiments which are mainly driven by the media and speculation.
Value is the story behind any trading experience. It's what the seller is willing to give and the buyer to accept. Cryptos’ defy the conventional a norm of value and this makes them hard for people to really comprehend let alone invest in. It seems like their value is perceived if people think so.
In the ideal world, the value of any commodity is driven by quantity and demand. Cryptocurrency narrative is very different. The technology behind them is the intangible asset that can be valued. This complicates the adaptability aspect and contributes to unpredictability. The uncertainty of not knowing what will happen in the future does not help either.
Depending on what will be floated in the market, what the sellers ask and their reaction to any market news is a complicated approach of getting value.
2 – Lack Of Central Regulation
Cryptocurrencies are not considered as legal tender so they have not been regulated by central banks. Little or no regulation spikes volatility because investors are not sure if their funds are safe. There are no guarantees of safety from market manipulation, spreading false information, insider dealing and unlawful disclosure of classified data is a reality.
The large investors take advantage of lack of regulation to turn the market into highly instantaneous and unpredictable arena. They create big buy scenarios by showing interest buy huge amounts. Regular investor interprets this to mean looming increase in prices which drive up the prices. When the prices favor the big guns they buy or sell and the prices go down. They have the ability to dictate the prices and this makes the cryptos very volatile.
Regulators move very slowly especially in the unfamiliar territory such as cryptocurrency. Regulation can legitimize any item as a medium of exchange, for use to pay taxes, buy stuff and close big business deals. This translates to more knowledge, familiarity, and acceptance by the majority. It drives the demand to high levels which in return will stabilize the currently averting the volatility swings.
Human beings have a strong dislike to uncertainty and loss. They won't invest in anything they might lose. The regulation provides the social confidence to boost the stability of currency and safeguards against disorder. Without regulation, cryptocurrency will remain volatile for longer.
3 – Lack Of Institutional Investors
The entrance of big investors signifies maturity of a market and an indication of it is getting an official structure. There are still few institutions willing to dip their hands into the honey jar. Conventional banks and other key financial industry players usually have low volatility as they mature in the marketplace. It may still be early to predict the direction key players will take but the fact that they have not invested (except hedge funds) make cryptos very unpredictable.
Large funds often relax the volatility, increase the trust of potential investors and increase the efficiency of the market. To the common person, large funds act an endorsement of the system.
4 – The Millennial Investor
The bigger group that is believed to have an appetite for cryptos are between 18 and 35 years of age. They witnessed the financial crisis of 2008 and have a permanent suspicion of the government and financial institutions. The collapse of banks and when most had college loans, left a bitter taste their mouth. They were early adopters of smartphone technology.
In cryptos, they saw a currency that offered security, privacy and peer to peer dealings without the need of Central Bank. This could also be completed on the smartphone platform. They need to have control and cryptos offered that.
The problem with millennials is that they are not very good investors. They would run at the first sight of trouble but will buy more if the market surges. They don't have the discipline to buy and hold for long period directly contributing to the volatility. Rejoicing when the coin improves and sweating when they prices dive is bound to cause panic to buy or sell making it hard for the coins to ever stabilize.
5 – The Group Psychology
Cryptocurrency is a sensation of the millennial. They are tech-savvy, can handle some risks (hoping to reap big) but also possess very reactionary behavior. They are disadvantaged in term of their investment abilities. They don’t have the investment experience and knowledge like their older generation. With low income and cravings for credit cards, when the market spikes they will even borrow in order to buy the coins.
They will invest when their peers do so and won’t take time to study the market dynamics. They are in a hurry to make ends meet; amass some wealth make up for the less time they have hard in the job market. Plans to go for a holiday in the Bahamas are underway.
In presence of a herd, there are always dealers looking to do some swindling. Salesmen selling high-priced consultation services, supplementary apps, product copies and whatever they can use to make a quick dollar. Add this to the ability of the big whales to swing the crypto market to their advantage and you have a recipe for high volatility.
6 – Media Influence
Publicity has a significant effect on how the performance of the cryptocurrencies. Positive new will lead to a spike in prices while negative will do the opposite Any news that break out related to problems like hacking of the blockchain network, bankruptcy will cause panic making the prices to nosedive.
If there is even a hint or information insinuating that the proceeds from the trade could be used in illegal dealing, money laundering or drug trafficking will lead to a depressed state of prices.
Media reports on the possibility of government regulation also cause fear among investor which drives the prices down.
Cryptocurrency Volatility Conclusion
Price stability is crucial for currencies to be used as a standard of exchange. The unexpected fall and rise in prices make it difficult for ordinary people to adopt. This is because not are willing to invest and loose. For people, to trade, you have to convert to normal a currency (fiat currency) which defeats the original intent of cryptocurrencies being cheaper, unregulated tools.
If it becomes expensive to exchange than government controlled currency, why would one invest in them? Well, it’s apparent that no one knows if and when cryptocurrencies will be stable. If you can handle the risks associated with the volatility go and ahead and invest. It could be a worthwhile rollercoaster.
The good thing is that the prices also go up and you could be in for an enormous gain becoming a millionaire overnight. All you need is information, research, and very sharp experts to keep you updated on the market performance. Use conventional, wisdom know when to buy or sell, when to run or stay and when to count your profits.