Why Are Bitcoin and Other Cryptos So Volatile?

Alternatively, most assets are priced based on the future value of their cash flows. This might mean the dividends a stock will pay out, or the coupons an investor receives from a bond. There will always be some uncertainty around these cash flows, but they create a relatively clear method for modeling the price of the asset, which creates a perception of lower risk among investors. Bitcoin’s price fluctuates because it is influenced by supply and demand, investor and user sentiments, government regulations, and media hype. The last factor is the average investor profile in the cryptocurrency industry.

Bridging the gap between fiat currency and cryptocurrency, stablecoins aim to achieve stable price valuation using different working mechanisms. The impact of this process is amplified in the market by the sheer size of Bitcoin relative to everything else. https://xcritical.com/ As long as Bitcoin retains a position as the largest cryptocurrency, its halving will have a direct impact on the overall direction of the market. There are a number of factors unique to cryptocurrency which either create or amplify this volatility.

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And as longtime value investor Bill Miller pointed out in a CNBC interview earlier this year, “One of the interesting things about bitcoin is that it gets less risky the higher it goes.” Because bitcoin is still a nascent asset class, it remains in the price discovery phase. “[It’s] the most volatile of any asset’s life cycle,” said Mike Bucella, Blocktower Capital general partner.

• However, understanding that the market is so quick to change can help you be prepared to better market brands that use cryptocurrencies.
• In truth, cryptocurrency is one of the most volatile non-derivative financial assets on the market.
• This suggests that limiting the new supply of Bitcoin might continue to impact supply and demand every four years.
• This is calculated using standard deviation, which is calculated as the square root of variance by determining each data point’s deviation relative to the mean.
• Volatility does not play favorites, and most crypto coins, even more familiar assets, like plain vanilla stocks, can experience the phenomenon of volatility.

Interestingly, neither of these projects has been completed yet, but news media have already publicized the initiative. So, entering the emerging market is a good way to get your product talked about and, therefore, known and crypto volatility recognized. This relatively small market size means that smaller forces can have a larger effect on price. If one group of investors decided to sell $500 million in gold, it would barely create a ripple in the price of gold.

Crypto Is Volatile — But Why?

Volatility is a red flag when it comes to adopting the existing cryptocurrencies, said Dr Sellos. “Low volatility means that markets are stable and offer reliable opportunities for investors, with high chances that those markets will offer similar rewards in future. With a market cap of about $825 billion, bitcoin accounts for less than 0.1% of all of the world’s aggregate wealth (somewhere north of $1 quadrillion). Other competing stores of value include gold, bonds, real estate, and high art. Bitcoin, which has increased in value by approximately 50x in the last five years, is considerably more volatile than most other assets, such as debt or equity. Volatility may indicate the potential for above-average returns on a trade, but it is also one of the main indicators of risk.

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Immature Markets

As a result, established regulatory systems find it difficult to manage them. There are several examples of a cryptocurrency’s growth being stifled because of a government tightening its crypto laws. For example, the recent restrictions imposed by China contributed to a period of severe volatility in Bitcoin prices.

When the cryptocurrency bubble was building in 2017, not just a few financial advisers told their clients to make bets in Bitcoin and other alt-currencies. By the end of that year though, most of the larger brokerage firms began banning trading in crytpocurrency as being too speculative . This likewise took potential buy-and-hold investors out of the cryptocurrency marketplace, and has contributed to volatility. There are measures, such as dollar-cost averaging, that can be used by less risk-averse investors to mitigate the detrimental impact of volatility. Long-term investors who have solid reason to assume that an investment will eventually rise in value don’t need to worry about short-term volatility as much.

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However, this creates short-term volatility in cryptocurrency prices as miners switch to more profitable tokens or hold onto tokens for a longer time. This volatility may even affect the long-term success of certain tokens and cause them to lose market share over time. That’s why cryptocurrencies that have a lot of coins in circulation experience lower prices than cryptocurrencies that don’t have as many coins in circulation.

Unlike other markets, such as real estate and the stock market, the barriers to entry into cryptocurrency trading and investing are extremely low. You don’t need a lawyer, trading license, or a minimum amount of capital to invest. Anyone with a few bucks and an internet connection can start trading instantly. Most cryptocurrencies like Bitcoin are purely digital assets and aren’t backed by anything physical like a currency or commodity. That means that their price is set entirely by the laws of supply and demand. Since the supply of many cryptocurrencies like Bitcoin is fixed or predictable, the price is dependent on how many people want to buy Bitcoin right now.

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HODL is an adage native to the Bitcoin community, derived simply from a misspelling of the word “hold”. It advises bitcoiners to remain stoic in the face of Bitcoin’s extreme volatility. This change will influence the economy in several ways, but is primarily negative.

Cryptocurrency is volatile simply because it is still at a very nascent stage compared to other investment tools and currencies

The empirical analysis is based on a dynamic Bayesian model averaging approach for twenty-two potential determinants. The results reveal that the most important factors for Bitcoin volatility are Google trends, total circulation of Bitcoins, US consumer confidence and the S&P500 index. Financial markets facilitate the trading of financial assets across many participants. These markets are usually owned by a company who pairs buyers and sellers of different assets and maintains the market’s fairness. Many of the factors that drove Bitcoin’s volatility in the past will become less relevant as time goes on.