There was a massive buzz around cryptocurrency at the beginning of this year. Many investors were flocking the market, but most did it cautiously. The market responded by welcoming them with handsome returns on their investment. However, the market dipped massively at the end of April and early May, depleting most investors’ wealth. To understand the magnitude of the crash, Bitcoin, the world’s number one cryptocurrency, crashed to a low of $31,000, losing over 50% from its all-time high (ATH) of $64,000 in mid-April. Although the market has since recovered, the huge volatility persists.
Why Are Cryptocurrency Prices So Volatile?
The simple answer is – because cryptocurrencies are still at a budding stage compared to other types of investment tools and fiat currency. The result of the newness is the high volatility experienced in the industry. In order to gather wealth quickly, investors experiment with their money and try to figure out how cryptocurrency prices swing or if they could influence the prices.
For instance, Bitcoin. Its price moved very wildly this year. At the beginning of the year, its price was below $30,000 but unexpectedly started rising in February. By April, the price of Bitcoin almost doubled. Later in the month, it crashed to nearly where it was at the start of the year. The recovery phase then started in June, and by August, the price crossed the $50,000 mark. The price crashed again to trade below that threshold. This case is now more or less the same for many other cryptocurrencies.
Other Factors That Play a Role in Determining Crypto Prices Include:
Utility
This is about how many people use specific cryptos and for what purpose they influence their price. For instance, if more people spend their cryptos buying goods and services and not just holding them, the prices may move upward. Therefore, as restaurant chains and online stores gradually warm up to the idea of accepting cryptocurrencies, the value of the coins is likely to grow.
Scarcity
This is the finite nature of cryptocurrencies. Bitcoins that will ever be mined in the protocol are set at 21 million. When more investors join the crypto industry, Bitcoin will be scarce, and its price may hit the roof. However, some coins use a burning mechanism, which destroys part of the coins in supply to create scarcity and influence their value.
Whales
Sometimes, crypto holders with large amounts of a coin start to sell, crashing the prices due to high supply. These holders are called Whales since they have a large holding and can affect the market through their transactions.
Fragile Investors
Unlike the stock market and real estate, the crypto market is not seen to need expertise. Therefore, most investors are part-timers. They invest with the hope of making quick money, but when that does not happen, they lose interest and withdraw their investment. This recurrent involvement and withdrawal from the market lead to volatility.
