Changes in the price of an asset are referred to as volatility in financial markets. It can be beneficial if there are consistent price rises or decreases within a broad range. It can also be dramatic, with sharp price swings in both directions. In a market, healthy volatility serves a variety of reasons, but it primarily offers opportunities for individuals to profit.
The cryptocurrency market has always been turbulent, but the last few years have been particularly tumultuous for millions of investors worldwide. Many people have won millions on the significant upswings, while many others have lost large and modest investments due to bursting bubbles and market downturns.
Still, in times of significant volatility and investor concern, marketing experts should know how to promote bitcoin firms. To figure out how to accomplish it, you will need to figure out what factors influence the price of digital money and how to take advantage of them.
So, why do cryptocurrencies have such a high level of volatility? Here are the primary reasons why Bitcoin and other cryptocurrencies’ prices are so volatile.
1. A New Market With Limited Liquidity
Despite the hype around cryptocurrencies, the market is still insignificant when compared to traditional trading assets such as fiat currency and gold. Even the all-time high valuation of $813 billion set in 2017 is negligible when compared to the $7.9 trillion gold market and the $28 trillion US stock market.
Because this is a small market with few participants, small forces can have a big impact on price. When an investor sells $500 million in gold, it has little impact on world gold prices, but when converted to Bitcoin, it has the potential to upset the market and produce a significant price swing.
Furthermore, because it only takes a few large orders to send values skyrocketing or tumbling, market manipulation is rampant in crypto markets, ranging from coordinated pump-and-dump tactics by collectives to deliberate inflating or deflating of trading volumes by exchanges. Malicious behaviour regularly causes alarm, which leads to even more volatility.
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2. An Open Investor Profile
Unlike traditional markets such as stock exchanges and real estate, bitcoin trading and investing have essentially no entry barriers. You don’t need a trading license, a lawyer, or a predetermined amount of money to start investing. All you need is a few dollars and access to the internet to get started trading right now.
The crypto market is the preferred environment for millions of novice traders due to its free-for-all character. Traditional stock market traders are significantly more educated and experienced than the average cryptocurrency investor. As a result, ideas like “fear, uncertainty, and doubt” and “fear of losing out” are especially vulnerable to cryptocurrencies. Crypto traders frequently act without blinking in situations where experienced traders might sit back and wait.
3. The Effects of Negative Press
Because of the mystique surrounding digital money, negative press has a more significant impact on its price than it does on traditional investments. Positive hype, on the other hand, can frequently lead to more fast-growing prices due to the novelty and fascination of the technology. Bold investors looking to get their feet wet in a hot new trend will find something to like here. Any shift in perception that causes the value of more established assets to rise or decrease would almost certainly result in a larger swing in the price of BTC, Ethereum, and other cryptocurrencies.
This may change when electronic cash becomes more generally accepted. However, perception isn’t the only factor that makes digital money volatile. One of the most appealing aspects of virtual currency, as previously said, is its natural fit for the worldwide market. Because of digital nativity, international transactions are substantially less expensive in terms of overhead.
Indeed, virtual currency has made it possible for us to imagine a world in which sending and receiving money is as simple as sending and getting email. However, as firms and individuals around the world continue to accept this as a viable option, national governments have had to deal with a variety of challenges relating to its regulation and position in their economies on their own.
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Speculation is one of the most critical drivers of volatility in the bitcoin market. Buying and selling cryptocurrencies allows investors to wager on the price of various cryptocurrencies going up or down. In reality, it is the cryptocurrency market’s volatility that attracts speculative investors trying to profit from price swings.
You can make a fortune if you can predict when the price of Bitcoin or XRP will explode skyward and buy exactly before it occurs. Similarly, you can benefit if you can short sell a coin just before it crashes. Many investors are continuously attempting to predict the cryptocurrency market’s highs and lows. These speculative trades add to the already choppy market’s volatility.
5. Cryptocurrencies are entirely electronic
Most cryptocurrencies, such as Bitcoin, are entirely digital assets with no physical backing, such as money or commodity. That is to say their price is solely determined by supply and demand. Many cryptocurrencies, such as Bitcoin, have a set of predictable supplies; thus, the price is determined by how many people want to acquire Bitcoin right now.
The biggest cryptocurrencies have no tangible assets to underpin their value, and no governments to enforce their usage as a currency. Their worth is solely based on faith. People are unlikely to sell Bitcoin if they no longer believe its value will hold or continue to climb. This can lower the price and persuade others to sell as well, resulting in a loop that rapidly lowers the price. The opposite can also happen, causing prices to skyrocket and price bubbles to emerge.
All these factors work together to cause bitcoin prices to move in seemingly random directions at unseemingly random times. Experts have frequently failed to predict the crypto market, and this is unlikely to change very soon. Understanding how quickly the market changes, on the other hand, might help you better sell brands that use cryptocurrency.