Cryptocurrency prices are well known for swinging wildly. Unlike traditional financial markets, where investments such as stocks tend to move in a more predictable range, cryptocurrency can see massive changes in price, including double-digit changes within hours. Such extreme volatility can be seen as both a challenge and an opportunity for potential investors.
In todays blog we are going to look into what makes these price fluctuations happen and why the crypto markets can be so unpredictable.
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Market sentiment and speculation.
One of the biggest influences in the world of cryptocurrency pricing is market sentiment. Traditional assets have their value tied to company earnings or cash flow where as cryptocurrencies are often driven by many values, but the main one is sentiment. Investors will often buy cryptocurrency based on news, social media trends and the general hype around a specific currency. Something as simple as a tweet from a well known influencer or a big endorsement can send the price of a cryptocurrency skyrocketing, while on the other hand negative news can cause the price to tumble.
An example of this would be when Tesla announced in 2021 that it would start accepting Bitcoin as a payment method. This caused Bitcoin’s price to surge. When Tesla decided to reverse this decision, blaming environmental concerns, Bitcoin’s price dropped quickly. This one example shows how such a decision can impact the price of even the most established of cryptocurrencies.
Simple supply and demand.
Much like any other market or product on the planet, supply and demand play a big role in the prices of any cryptocurrency. For example, Bitcoin has a fixed supply of 21 million coins. The more people that buy and hold Bitcoin, decreasing the available amount can drive up the cost.
While people buying and holding a currency can drive its price up, if any large investor (Referred to as “whales”) decide they no longer wish to have a position in a currency decide to sell a large amount of the tokens, this can cause the market to become flooded with the currency, forcing prices down.
There are several cryprtocurrencies that have a mechanism called “burning”. This involves destroying a portion of the coins to reduce the supply and increase the scarcity of the token, in turn potentially leading to an increase in the value.
Developments in crypto’s regulations.
Government regulations also have a large impact on the pricing of cryptocurrencies. Since cryptocurrencies operate in a largely upregulated space when compared to traditional finance, any sign of a crackdown in regulations can send shockwaves through the entire crypto market.
When China decided to crack down on Bitcoin mining in 2021, the markets saw a very quick, sharp drop off in the value of Bitcoin.
A further example of this would be when the U.S Securities & Exchange Commission (SEC) either approves of rejects any crypto related product, such as an ETF, the currency in question can experience a significant increase or decrease in overall value.
The global economy.
While cryptocurrency does operate outside the box when it comes to traditional finance, this does not make it immune from the general financial climate around the world. Factors such as inflation, interest rates and global economic instability can still go a long way when it comes to the crypto markets.
During times of high inflation, some investors will turn to Bitcoin to hedge against declining traditional currency values.
While this can increase the value of cryptocurrencies, when banks raise interest rates, some major crypto holders will choose to sell off their crypto assets in favour of a more stable, yield-bearing investments. Once there is a lot of movement in sales of any particular crypto, people are likely to get nervous and attempt to sell their assets. Like with traditional stocks, when a lot of anything starts being sold the price tends to drop.
Upgrades and development of the technology.
A further factor to consider is how crypto prices are affected by changes and advancements to the blockchain. When a cryptocurrency has a major upgrade, such as Ethereum’s upgrade to 2.0, if can affect the market and users confidence, often attracting a new batch of investors.
Crypto is still growing and has a lot of potential, but with a lot of potential comes a lot of change. To stay in the game and ensure any currencies long-term growth, the developers are constantly developing new and exciting way for users to interact with their investment.
Security breaches and hacks.
While upgrades to the technology can increase the value of a cryptocurrency quickly, there have been plenty of instances where a particular currency has had a security flaw that was exposed by hackers.
People do not want to be at risk when they are investing in an already risky market, considering the lack of regulation that surrounds cryptocurrency. If any particular currency reports a security breach, or holding wallets that have been hacked, users will lose confidence in the project and are likely to sell off most, if not all of their investment. This can cause a once valuable cryptocurrency to crash in a matter of hours and be nearly worthless.
Institutional Investment.
Recently, cryptocurrency has started to attract institutional investors and large hedge funds, scared of missing out on a massively growing financial market. When such investors by Bitcoin or other digital assets, they tend to do so in very large amounts. This can radically alter the price of the currency in a very short amount of time.
As with any product, the more people that invest, the higher the demand and then the higher the price. The only risk of such investment is like when a project has a security breach, if any of the large investors decide to pull the plug and sell off their assets, the price of the crypto can take a massive hit.
Crypto Analyst’s Final Thoughts.
While the volatility of the crypto markets can present opportunities for investors and traders alike, it also poses a risk for the investors who are seeking long-term stability. There are so many factors that can influence the price of a cryptocurrency that it makes them very hard to track and predict, unlike traditional stocks and shares.
Understanding some of the factors that can have an affect on the prices will help any investor make better decisions when it comes to buying and selling in the crypto markets. Without such research and guidance, it can be a long, hard road.
While, for now at least the volatility is here to stay, who knows what the future will hold for cryptocurrency. As we look towards mainstream adoption, this constant volatility may become a thing of the past, but so will the opportunity to profit in the crypto markets.