Planning to start investing in the crypto space? Then to have a piece of deep knowledge about the volatility, its causes and impacts are mandatory. A better understanding of the concepts that impact greatly on your investments would be helpful either to give a boost for your profits or safeguard from any possible loss.
Volatility, in general, refers to the ability to change rapidly and unpredictably. Hence, the asset tends to be more volatile, the greater would be the risks associated with it. Therefore, in this composition, let us try to analyse the various reasons that could impact the volatility of the cryptocurrencies in specific.
What are Cryptocurrencies?
Cryptocurrencies are basically a digital form of currencies that are built as an ‘alternative to fiat currencies’. These are not controlled by any authorities or governments and hence the price tends to swing depending on various factors.
The crypto space is well acquainted with the fact that Bitcoin’s prices keep on changing every now and then. The factors like any announcements, legal proceedings, or any major event occurring might affect the price.
How does value of Bitcoin is Determined?
Bitcoin’s value is determined by supply and demand. When the demand for the asset increases, the price also increases and decreases with the decline in demand. As we all know Bitcoin’s supply is limited to 21 million coins, the new coins are created or mined at a predictable and decreasing rate.
Therefore, now we can say, the factors contribute more to the supply and demand of Bitcoin, which in turn plays a vital role in determining the price.
Let us have a deep insight into the factors that directly or indirectly may be accountable for the jump and dip of Bitcoin price.
Economists believe that human psychological factors affect investor decisions. This is known as Animal Spirits refers to investors making decisions which are based on the concert of other market contestants and their own sensitivities, rather than solid investigation.
Market sentiments play a major role to keep the price high or low. If the community has a positive approach, the price might also tend to grow spontaneously. Scrutiny of the Bitcoin price displays that encouraging media exposure is one of the main factors driving the price.
Hypes, FUD, Bubbles
As said, the price completely depends on the supply and demand, hypes or booms may be created to boost up the demand. The traders having a sense of FOMO(Fear of Missing Out) tend to invest and hence shoot up the demand.
On the contrary, due to any FUD(Fear, Uncertainty, Doubt) created my generate a negative wave among the investors which may tend the investors to sell-off their holdings. Thus, declining the demand which results in a price plunge.
In the third case, a Bubble which can be looked upon as small-time publicity to promote the asset’s demand. With the trigger, the price tends to shoot up drastically, but when the bubble bursts, the price dips to the bottom levels.
The Government Moves Impact Price
The regulation proclamation made by governments and geopolitical events frights the Bitcoin users. The news of governments where the crypto markets share a large space impacts the price at a larger extent.
With the government’s positive move towards regulating cryptocurrencies, the price may also jump as the investor’s sense of security. But on the other hand, even with the rumours of the government might restrict the cryptos or possibly ban, the panic exit of the investors may impact the price to a large extent.
Political hazards around state currencies can also distress the Bitcoin value as people practice it to hedge against price movements in a specific currency, or they require to rapidly move large amounts of value out of a country or currency.
The recent U.S.Dollar crash created a huge amount of uncertainty among the investors who disowned fiat and fled in search of safe havens for their investments. Some jumped on gold but many believed that cryptos like bitcoin could probably fetch more profits than any other investments.
In another example, Venezuela’s hyperinflation led to the mass adoption of Bitcoin in the country. The Bitcoin user’s soared with massive trading volume recorded.
Word of Mouth Plays a Vital Role
One of the major factors that fuels the volatility of Bitcoin price is the role of the news media or any other media house. With positive news surrounding the space, the interest of the investors aggregates which in turn causes market participants to buy Bitcoin.
One of the examples was back in 2017, when news broke that Coinbase planned to add Bitcoin Futures, nearly 100,000 users joined the platform in a single day.
On the contrary, with negative news outspreading the market, it could demotivate the investor’s sentiments, hence hampering the overall performance of the digital asset. The recent KuCoin hack and some similar instances, left the Bitcoin space with uncertainty.
On the whole, speculation plays a vital role in determining bitcoin value. Therefore, the above all factors contribute in the speculation process either directly or indirectly. Other than these many other factors may also account for the overall performance of the digital assets.