There’s no doubt that cryptocurrency volatility has helped some people to grow their wealth in a very short time frame. It is equally true that the same volatility has caused many people have lost significant sums when they have been left holding the currency when the market has nosedived.
This volatility has led many to believe that cryptocurrency is a scam and should not be trusted. While there are arguments to be made both for and against that proposition, the truth is that cryptocurrency such as Bitcoin, Dash, Ethereum and many other variants continues to generate enormous interest in the market and is likely to be around for some considerable time to come.
So, why are these currencies so volatile?
There are several reasons for this. The key ones are:
- The size of the cryptocurrency market when compared to fore currencies or the gold market is still quite small. At its dizzy heights, the entire cryptocurrency market had a value of around $US800 billion which seems large, but when compared to the size of the international gold market which is estimated to be worth $US7.9 trillion, it is miniscule. The size of the market, therefore, makes it vulnerable to large investor/trader decisions. If a large player decides to sell a good portion of their cryptocurrency, the effect on the cryptocurrency market can be quite significant.
- The digital nature of cryptocurrencies means that they are effectively backed by nothing other than the faith of the market. Whereas physical currencies carry government backing. Therefore the nature of cryptocurrencies makes its value dependent upon the basic laws of supply and demand. If people believe that the price will fall due to a lack of demand, they will sell and there’s no government body like the Reserve Bank posed to intervene and shore up the cryptocurrency.
- The technology is still developing and problems like being able to scale the currency to meet demand are still being tackled by developers.
- The very nature of cryptocurrency makes it attractive to short term speculators. The potential to make huge profits by buying or short selling at the right time tends to attract a lot of speculative money into and out of the market.
- Media coverage tends to amplify both the potential rewards and the downsides of trading in this currency. Headlines about Bitcoin surging or falling seem in many ways to be self fulfilling prophecies as the market tends to respond to these headlines. This could be due in part to -
- The average cryptocurrency investor/trader profile is a little different to Forex traders or Stock market traders. Anyone over 18 with an internet connection can buy and sell cryptocurrency. This tends to make the market very volatile with many participants in the market not really understanding what they are involved in or how the market operates. Many of these investors get caught buying high and selling low as they follow the market trends rather than doing proper analysis and adopting workable strategies.
As with any trading scenario, cryptocurrency trading requires due diligence and research to be done before entering the market. It is possible to profit from the cryptocurrency volatility as it is also possible to suffer large losses. It is recommended that before you enter the crypto or Forex markets that you do the appropriate research.
