Cryptocurrency: Why it can be so volatile
Cryptocurrency’s instability is well established but can even catch experts off guard from time to time. According to data provided by the Statista Digital Economy Compass report, XRP had the second highest annualized volatility rate of 153% with an average of 8% price change on a daily basis.
While this type of price instability can feel like a rollercoaster for long term investors, active short term traders thrive on the volatility.
What Excites People About Cryptocurrencies
The ability to make a huge amount of money in a short amount of time is what appeals to people about cryptocurrency. Another reason why people are turning to it is privacy. Security is also important. The volatility aspect is what makes cryptocurrency so exciting to investors.
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A volatile asset is the only type of asset that can deliver a large sum of returns in a short amount of time. These healthy returns have made cryptocurrency very popular across the globe. For example, many of the smaller market cap coins like XRP can see the biggest movement and traders look to take advantage. At time of writing, out of 350 Binance users’ votes, 52% of them rated XRP as “very bullish.” This bullish sentiment combined with high volatility can generate significant returns for traders and investors alike.
Cryptocurrency Is Still an Emerging Area of Investment
One of the main reasons for the ongoing volatility of cryptocurrencies is that it is still an emerging industry. Even though Bitcoin and other coins get a lot of attention from the media, the size of this market is tiny compared to gold or fiat currency. As of this writing in September 2024 the cryptocurrency market was $2.09 trillion. That’s pocket change compared to the $10.9 trillion gold market cap in 2020. The United States’ stock market had about $55 trillion in assets in July 2024.
With a small market, a small group of investors can create a big effect depending on what they do. If an investment group decided to sell $100 million in Bitcoin, the market would see significant volatility.
It’s All Digital
Bitcoin is a 100% digital asset. It’s not backed by anything. Its price is set by its perceived value. If people want it, they’ll pay for it. Supply and demand controls this market. If not many people want to buy Bitcoin, its price will drop. This can lead to a negative feedback loop or cycle of plunging values.
The Infrastructure Is Under Development
Blockchain is still in its early developmental stages. Although a lot of firms use it, there’s still a long way to go in building the infrastructure. The scalability problem pushes prices of cryptocurrencies lower. On the other hand, some platforms and apps can send values soaring.
Speculators
Speculators drive the market. They bet on prices. The volatility lures them. Guessing the market just adds to the volatility. This creates a positive feedback loop of chaotic activity.
Good and Bad Press
The media, whether it creates good press or bad press about cryptocurrency, feeds into the speculation and volatility. Investors and speculators are always scouring the internet for tidbits to inform their decision-making processes. They try to do this before the next investor does. They even create algorithms to check news feeds. Inaccurate reporting may feed into the volatility of the cryptocurrency market.
This content is for educational purposes only. Your situation is unique, and the products and services discussed here may or may not be right for your individual situation. This is not an offer of financial advice, or financial services. Performance information may change. Past performance is not indicative of future results. All investing includes the risk of loss. The opinions expressed here are that of the contributor alone.
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