The cryptocurrency world is not for the faint hearted. Recently, most cryptocurrencies have been experiencing a dip. What exactly is the cause of the dip?
While we want to always benefit from our crypto investment, bear in mind that losses are sometimes inevitable. Cryptocurrency is highly volatile.
Why are cryptocurrencies so volatile?
Below are some of the reasons;
1 Cryptocurrency is still an emerging market
The market is still minuscule and this makes smaller forces to have a larger effect on the price. The size of the market cannot be compared to Fiat currencies and gold.
The small and developing nature means there are other opportunities and new projects to hit. Cryptocurrency is still developing, a smaller force can ripple the price and it's enough to destabilize the market.
2 Cryptocurrencies are purely digital
There is no physical asset to back up its value. The price is entirely dependent on the forces of demand and supply.
Permit me to say, their value is also backed up by faith.
If people no longer believe that the value of Bitcoin will hold or continue to rise, they’ll likely sell. This can reduce the price and convince others to sell too, so a cycle forms and quickly plunges the price downwards. The opposite can also happen to shoot prices up and form over-inflated price bubbles.
3 The technology is still developing
Like I said earlier, it's a developing market. It will take a while before the market reaches maturity. As the market is developing, crypto technology is also developing.
Stubborn technological hurdles like the blockchain scalability problem cause downward pressure on crypto prices. Their consequences are also crystallized in the form of network congestion and high transaction prices.
On the other hand, pivotal developments in the technology can have a boosting effect. There are also lots of new cryptocurrencies popping up all the time looking to compete and take some market share from the established ones.
4 Speculation
One of the biggest drivers of volatility in the cryptocurrency market is speculation. This involves investors betting that the price of different cryptocurrencies will go up or down by buying and selling cryptocurrencies. In fact, it is the volatility of the cryptocurrency market that lures speculative traders looking to make big money by guessing the swings.
Many investors are constantly trying to guess the up and down swings of the cryptocurrency market. These speculative bets cause even more volatility in an already choppy market.
The media also has a massive impact.
Speculators and investors are constantly eyeing the headlines for the next big news story that will launch or crash the market.
The average investor in the cryptocurrency market is far less experienced and educated than with most other markets. This means that the cryptocurrency markets are extremely vulnerable to hype, FUD (fear, uncertainty, and doubt) and outright manipulation. In situations where experienced traders might keep their cool, crypto traders often panic.
Anyone with a few bucks and an internet connection can start trading instantly.
This is why the crypto market is the market of choice for millions of amateur traders around the world. On the other hand, institutional investors are particularly cautious of the crypto market. Many see it as far too risky to go near at all, let alone invest serious capital in it.
Always do your research before diving into the market.
If you can pick when the price of Bitcoin or other crypto will burst upwards and buy right before it does, you can make a killing. Likewise, if you can short sell a cryptocurrency right before it crashes, you can profit too. This is how some of my friends have benefited from the market.
When something does emerge, everyone knows it's a race to buy or sell and the fastest will profit the most, while the slowest will lose the most. But this is not always the case.
Note that before you go into the world of cryptocurrency, be sure you are mentally prepared especially when the outcome is bad. Cryptocurrency investment may also require a lot of patience.
Many have made millions on the big upswings and others have lost small and large investments in the sudden market downturns.
It is a game of luck as some people may say it. Good luck with your investment and don't be too carried away with only the financial benefits of it neglecting the other positive side of it.