Cryptocurrencies have marked a shift in the modern world. The way people perceive physical currency has transformed. They have become more alert to the future of payments and trading.
Digital currencies have provided numerous benefits, primarily being a secure platform for buying and selling. Moreover, blockchain technology has provided employment to many people. Although the list of various advantages does not stop here, it also poses various downsides.
One of the biggest challenges in cryptocurrencies is their price fluctuation. The Crypto market is one of the most volatile asset markets. Due to its narrow trading market, the volatility is inconsistent for different cryptocurrencies.
While Bitcoin might have high volatility, some other coins would probably rank lower in price fluctuations. Many traders tackle this problem by updating themselves with regular news on platforms like https://www.okx.com/markets/prices. However, there are many reasons for such high volatility, especially in some currencies.
Volatility is a factor to measure regularly. People do not consider it a vital component. They think this is an unavoidable and immeasurable element that is yet to influence their portfolio. But, forecasting the volatility in advance can help a person attain an edge over other investors. They prefer crypto trading for its secure environment and bright prospects despite all these unfavorable factors.
7 Most Crucial Reasons For High Volatility In Some Cryptocurrencies
Source: computenorth.com
High volatility is a significant reason for many people not investing in cryptocurrencies. However, people can understand more about the behavior of such variation in prices through the following points.
Initial Stage Of Crypto Market
As compared to stocks, equities, and other asset markets, cryptocurrencies have just been introduced into the market. It has not been a well-settled market for everyone. Many people are still unaware of these digital currencies.
Since the market is still developing and in the introduction phase, various testing and trials occur simultaneously. Traders check the market for investing, which causes a regular change in the price movement.
Due to their greater acceptability, some coins gain immense praise and popularity in no time. On the other hand, when a new cryptocurrency is introduced into the market, its price remains stable. For example, a sudden mention of a currency induces a price rise in the digital currency, whereas the prices of other currencies remain the same.
Lack Of Regulating Body
For every asset class, there is a governing body. These bodies or agencies control and guide the trading and investing process. It lays rules and guidelines for the smooth and efficient working of the trade mechanism.
In the case of cryptocurrencies, there is no such controlling body. There is no regulation of the minimum or maximum price of cryptocurrencies. As a result, it is left to demand and supply market forces to determine the crypto prices. This leads to higher prices of some currencies.
Demand & Supply
Source: fool.com.au
As mentioned earlier, there is no controlling agency that monitors the crypto market and the prices. As a result, the price movement is influenced by the demand and supply of various cryptocurrencies.
These forces impact the prices more due to the relatively smaller market of the asset. Since the number of traders investing in cryptocurrencies is less, a sudden selling or buying will lead to a massive price change.
When the demand for any cryptocurrency increases, the prices will rise eventually to maintain an equilibrium. On the other hand, when the supply increases or exceeds the demand, the prices of a particular cryptocurrency will fall to equal the demand.
Speculative Nature
There are many speculative activities prevalent in the crypto market. People predict the nature of the market using various tools and techniques. As the influence of digital currencies is spreading, more people get involved in betting and forecasting the price movement. This speculative nature gives rise to more volatility of various coins, especially Bitcoin, Ethereum, and other popular coins.
Government Regulations & Policies
Government levies tax on crypto trading in various regions. Similarly, there are many strict rules and regulations the government imposes on the buying and selling mechanism of cryptocurrencies. When these guidelines are released suddenly, the prices of particular currencies either fall or rise depending on the favorability.
Media Influence
Source: spinxdigital.com
Media also impacts the prices of cryptocurrencies. The most common example of this is when Elon Musk tweeted about Dogecoin. As soon as he tweeted this, the rates of the crypto coin rose.
Similarly, when media channels and houses cover advantages and different aspects of various digital currencies, they motivate people to buy specific currencies while withdrawing from others. This causes an influx in price movement.
Scarcity
As stated earlier, the number of investors is less in the crypto market. This developing market has limited resources or currencies. This scarcity leads to high price fluctuations. As soon as new people join the market, prices increase and vice versa.
Conclusion
From all the factors above, the demand-supply factor is the most significant impact or reason for the uncertain volatility of some cryptocurrencies. There is always a price movement in different asset classes, but the price change is nullified due to a regulatory force.
Cryptocurrency is a marketplace for investors who can risk their portfolios to earn massive rewards in no time. At the same time, it requires courage to invest in a market where the prices vary regularly.
In order to minimize the price effect, cryptocurrency price trackers are good options. This facilitates traders to monitor the rates and predict the trend in the future. However, a person should research and scan reports of different crypto coins to determine the trading volume and position.
