Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and control new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. They experienced a massive surge in popularity in 2017, with the value of Bitcoin reaching over $19,000 per coin. However, since then, some popular cryptocurrencies’ value has dropped significantly. So what makes Cryptocurrency so volatile? Here are eight reasons.
1. Lack of a Controlling Agency
Since cryptocurrency is decentralized, no single agency or group of people is backing it at any point. This makes it highly volatile because it means that cryptocurrency as a whole is not as stable as other types of investments, such as stocks or bonds. For example, cryptocurrency has been known to go through rapid inflation and deflation, which has led to cryptocurrency becoming a horrendous investment.
2. Smaller Market Size
Since cryptocurrency is decentralized and has no controlling agency, it is not as well-known or supported by the world population. This means that even top cryptocurrencies don’t have as large a market size as other currencies. For example, cryptocurrency exchange only makes up 0.15% of the world’s foreign market. This means that cryptocurrency is only traded and supported by a minimal number of people, which is why cryptocurrency tends to be more volatile than other types of currencies.
3. Price Discovery Stage
Another reason cryptocurrency is so volatile is that it is still in its price discovery stage. Cryptocurrency doesn’t have a stable market, and cryptocurrency is still trying to determine where the prices should be. This makes cryptocurrency very volatile, and it can never be sure of its actual value. For example, cryptocurrency will often experience dramatic drops and increases in prices.
4. Limited Supply and Major Holdings
One of the main reasons cryptocurrency is so volatile and the prices vary so much is because cryptocurrency has a very limited amount. This means that cryptocurrency can get very volatile when the prices get too far from their original value. Additionally, some major cryptocurrency holdings can influence the increase and fall of prices.
5. Fragile Investors
Since cryptocurrency is so volatile, it can have a very negative effect on investors. This is because cryptocurrency often experiences large drops in value or inflation, which investors don’t like. It causes them to sell off their cryptocurrency.
6. Developing Technology
One of the main reasons cryptocurrency is so volatile is because cryptocurrency has been developing its technology ever since it became popular. For cryptocurrency to become more stable, it must first increase its market size and figure out its worth.
Cryptocurrency is highly volatile because its prices tend to be very speculative. Since cryptocurrency doesn’t have that large market size, investors are not always sure where cryptocurrency prices should be. People speculate on cryptocurrency prices, which leads to confusion and cryptocurrency volatility.
8. Purely a Digital Asset
One of the main reasons cryptocurrency is so volatile boils down to being a digital asset. Since cryptocurrency has been growing in popularity, investors have been taking cryptocurrency more seriously, which leads cryptocurrency to become more and more volatile in the market.
The value of cryptocurrency has dropped significantly since the end of 2017. For cryptocurrency to become a more stable currency, it needs to increase its market size and figure out its worth.