In contrast to conventional currencies like the Euro and the Great British Pound, which typically experience variations of 0.5% to 1% daily, cryptocurrencies exhibit significant fluctuations, occasionally ranging from 5% to 10% within a single day.
This notable volatility holds significance because making timely transactions can result in substantial gains for traders.
It is not unusual to witness trading intervals during which a pivotal event induces price swings of approximately 50%, and in certain significant instances, even reaching up to 200-300%.
What attributes contribute to the heightened volatility of this asset class compared to other readily tradable assets in the market?
Pinpointing a single exact reason for the volatility of cryptocurrencies is challenging; instead, we can identify several reasons outlined below:
No intrinsic value
Cryptocurrencies often lack product sales, revenue, or significant employment.
They don’t usually provide dividends, and a small portion of their value goes to development, making valuation challenging.
Assessing if they are overbought or oversold and determining reasonable value is complex, relying on market sentiment influenced by media outlets for lack of fundamental indicators.
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Lack of regulation
The volatility of cryptocurrency prices can be influenced by the absence of regulation in this space.
The minimal regulatory oversight enables market manipulation, frequently achieved by placing orders with the intention to cancel.
In contrast, in a regulated market like the foreign exchange, the act of placing fake orders is illegal.
The creation of these deceptive orders can distort market behavior, fostering uncertainty and contributing to volatility.
Supply and demand
The volatility in the price of crypto can be attributed to basic Economics.
When the demand for an asset outpaces the supply, the price is prone to increase.
This dynamic was evident in the case of Bitcoin during the Christmas period of 2017.
The widespread demand for Bitcoin, driven by traders’ profits throughout the year, surpassed the available supply, resulting in the price reaching an all-time high of around $20,000.
Lack of institutional capital
While crypto attracts notable venture capital firms, hedge funds, and high-net-worth individuals, the majority of institutional capital stays on the sidelines.
Currently, there’s minimal progress on a Bitcoin ETF or Mutual Fund, anticipated to bring crucial institutional volume to the cryptocurrency markets.
Market size
The cryptocurrency market, just a decade old and valued at $250 billion, is still emerging.
In contrast, the foreign exchange market, at $5 trillion per day, maintains stability despite market fluctuations.
Unlike the foreign exchange market, the relatively small size of the cryptocurrency market enables large traders (whales) to influence it significantly through substantial transactions.
When will volatility decrease?
Over time, we anticipate the implementation of increased regulation, a broader range of investors, and a more mature perspective on the crypto market.
Additionally, we can foresee heightened utility value as merchants discover more convenient methods of accepting cryptocurrency, and advancements in transaction technology.
While volatility might decrease, analysts anticipate a gradual but consistent increase in the overall value of the cryptocurrency market.
Just as the stock market has accommodated long-term holders, the cryptocurrency markets are likely to follow suit. At the very least, it seems to be a presence that will endure in the long run.