Cryptocurrencies are taking the world by storm. However, this has also created lots of fury among new users that have invested billions or a good sum of their investment in the crypto market and still don’t know how they work.
Though the crypto sector has been present since 2009, the major developments started to take place in 2018, when Bitcoin, the world’s first cryptocurrency, nearly touched $20,000.
Since then, Bitcoin has moved up and down and crossed $69,000 in 2021.
During this period new crypto projects have also increased over many folds, which is now over 18,406 crypto projects to be specific, according to CoinMarketCap.com.
There are many factors that are also responsible for the volatility of cryptocurrencies that including speculations, scarcity, digital in nature, emerging market, media, whales, and no regulatory mechanism.
Let’s take a look at those reasons why crypto can be so volatile.
1 – Speculations
One of the biggest drives of the volatility of cryptocurrencies is speculation – there is a lot of it daily on various social media platforms.
Some experts speculate about crypto projects and crypto influencers also participate in this movement getting paid to promote the brands that might be good for users.
Many times, it also happens that various channels promote a project alleging its potential, inducing users overnight. When they start buying it, the team vanishes, and users’ money is gone.
That’s why users need to be very careful and should always cross the information they are getting from various sources so that they don’t end up losing their hard-earned money.
Due to speculation, the prices of coins can come down to zero and vice versa.
Crypto traders often want to get this speculation right and do keep an eye on the developments happening in crypto markets on a real-time basis.
2 – Paid media
Media also plays a very important role in the volatility of cryptocurrencies.
Many media channels under the garb of awareness programs promote information on crypto, making false promises to users.
In India, this was a fact and film actors and actresses were roped in and paid millions to say that crypto can make you rich very fast and all sorts of false promises.
As a consequence, the government demanded all crypto exchanges stop and take down all unsolicited advertisements from news and entertainment channels.
Media also started running daily crypto trading price information that attracted new users and investors to the promoted coins, but, soon all these coins vanished, duping victims, as the price of those coins was biting the dust.
3 – Scarcity
Scarcity is a major question, as cryptocurrencies come with a limited supply.
Many cryptocurrencies also have a burn mechanism that destroys coin supply, thereby raising its value.
So once the coin is launched and its whitepaper provides attractive information to users, they will start buying it.
This is done to hold as many coins users can hold at the rates, as the rates can spike after a few days.
4 – Digital in nature
As cryptocurrencies are digital in nature, it is not backed by any assets like fiat currency or commodities.
So the price is set by the law of demand and supply, and with fewer coins with good use cases, there will be more demand for such coins.
The prices of cryptocurrencies also depend on the holders they have. The more holders, the more trading happens, thereby increasing or decreasing the valve of the coin.
5 – Whales (Big investors)
Whales also referred to as big investors, are the biggest manipulators of cryptocurrency prices who can pump money on a coin and take it to the moon, or sell huge quantities and pull down the coin price within minutes.
As there are no trading barriers, whales can manipulate prices and get away with profits every time, whether the price rises or falls.
They also cause volatility in prices, as retail investors which follow whales can end up playing in their hands.
So many crypto projects have even barred whales from buying beyond a certain percentage in the project to check price volatility.
6 – Lack of regulatory mechanism
Unlike other asset classes, crypto is not governed by any sort of governing or controlling agencies.
They are not controlled by any entity, like fiat currency or equity or bonds are controlled and managed.
In India, as of now, there is no regulatory framework under which cryptocurrencies come, but globally, some countries have tried to bring crypto under regulators mechanism, like Dubai, Singapore, others.
The only reason investors are getting attracted to crypto is that the user can always remain anonymous, which is a real cause of concern for governments globally.
The emerging technology of crypto
Cryptocurrencies are still at a nascent stage and developments are still happening, making them one of the emerging technologies.
However, many nations are not very keen on adopting crypto, as there is no standardization of crypto technology that is acceptable to all nations.
It is barely over a decade since the idea of peer-to-peer cryptocurrency is among us, but it will take over a decade more for the markets to mature.
Before the markets become mature, volatility will be a part of the crypto market.
All these factors are responsible for volatility in the prices of cryptocurrencies. Unless users are completely aware of this, they will keep booking losses, but there is hope: if users do proper research on crypto projects, they can mitigate the risk of price volatility.