Cryptocurrencies have so many advantages over fiat. For starters, there is the advantage of anonymity and the fact that they are not regulated by anybody or government makes them safe from manipulation. Additionally, cryptos can be moved across borders without the exorbitant fees charged when exchanging fiat. But still, cryptocurrencies have a big challenge in that they are extremely volatile. So why are cryptocurrency prices so volatile?
Here are 5 reasons why cryptocurrency prices are so volatile:
No fundamental value
Cryptocurrencies have defied the traditional definition of value. They neither earn revenue nor pay bonuses like the normal stocks would. Determining if they have been overbought or oversold is not as straightforward as the normal stocks. Value is mostly determined by what the buyers and sellers are willing to pay and this is often affected by the news. This makes cryptocurrency prices oscillate quite frequently.
No central regulation
Because governments do not recognize cryptos as legal tender, they cannot be regulated by central banks. The lack of regulation makes investors unsure of the safety of their funds and any little scare throws them into panic mode causing them to sell en masse. Such an action by investors will cause the cryptocurrency prices to plummet in seconds.
It’s estimated that more than 80% of the crypto investors are aged 18-35. This is a segment of the population that saw the effect of the 2008 financial crunch and developed a suspicion to financial institutions. This is why they readily invest in cryptos. The only problem is that millennials are very impatient. They won’t hold on to their investments hoping for a better day when prices start going down. They quickly sell and wait to buy back when the prices are rising. Since these are the vast majority of the investors in cryptos, their actions keep pushing prices up and down.
Thin order books
Crypto investors are usually advised to avoid leaving their cryptocurrency on exchanges because exchanges can be hacked. The result of this is that all of the tradable supply of a given coin is not usually available on the exchange. This means that if a large order is placed, it can quickly eat through the order book causing a slippage.
No institutional capital
Even though cryptocurrency adoption is on the rise, there is still very little institutional capital. For instance, even though most banks would agree that cryptocurrency is an awesome technology, they are yet to commit some funds to it publicly. Intuitional capital would help soften the volatility by introducing efficiency in the crypto market. For instance, they could set up a mutual fund for buying for their clients on a long-term basis.
The crypto market is still growing and as the investors get to understand it better, we can expect the volatility to reduce over time. As the volatility decreases with time, cryptocurrency prices of the major coins will steadily squeeze upwards. The overall winners will be the patient investors who look at the bigger picture as opposed to reacting to everything that happens in the market.
Get your FREE 7 Common Crypto Investor Mistakes guide by clicking on the image below