Guarda Wallet team discussing the hottest cryptocurrency market topics within the Guarda Education project. This time, we will break down the basics to one of the most painful crypto market questions – why is cryptocurrency so volatile. Will cryptocurrency volatility ever stop?
What are the reasons for cryptocurrency volatility?
There are several reasons for the cryptocurrency market being so unstable. Let’s discuss them one by one now.
Reason 1. Lack of Liquidity
Despite massive valuations that cryptocurrency is known for, there is no product, revenues or employment associated with crypto. Due to this fact, it is hard to value crypto. Without the very basic information, investors can only rely on market sentiment. The market sentiment (that we have already covered in this article) often gets dictated by the media that cares more about clicks than legitimate news coverage.
Reason 2. Lack of Regulation
The second reason for cryptocurrency volatility is that there is a lack of regulations. Governments and institutions still did not make their way int the crypto space, so regulatory oversight basically does not happen at all. As nobody controls the flow, there is a way for market manipulation. Do you know these pumps and dumps? That’s exactly the case. In turn, these activities spark volatility fire and discourage institutional involvement.
Reason 3. Lack of Institutional Capital
There is definitely a huge interest in cryptocurrencies that is coming from capital companies and individuals with outstanding net worth, but the institutional support is still not on the crypto side. Banks often suppose that there is lots of potential in the cryptocurrency market, but state that they are not ready to fully commit and invest. Institutional capital may come in a great variety of forms, but all of them help to ease cryptocurrency volatility.
Reason 4. User Discipline
If you imagine yourself an investment, you probably think of something you put your money in the long term. Gold, diamonds, real estate, you name it. You are not really worried about weekly-yearly movements in price – you are not going to trade anyway. With cryptocurrencies, it is all different. You will be checking the price daily. Of course, some early-adopters got some Bitcoin and are now just watching cryptocurrency price go back and forth. However, the vast majority is not doing that. We are living in a world of traders who often panic-sell or buy some coin because it was featured in the news today. Such behaviour contributes to volatility hugely.
Reason 5. Mentality
Think about one thing here for a moment. Who buys cryptocurrency? It’s very unlikely to be your grandma, right? Crypto is a phenomenon of millennials and this is often an issue. Investors comprising of people from the same group adopt so-called herd mentality – they basically do the same actions. When talking about millennials, we can say that the people going on the crypto adventure often decide to make risky investments. By this, we mean that they would invest literally all the money they have (and cannot afford to lose). So, when something goes not according to their plan, they are dumping en masse. On the other hand, when the crypto market starts surging up – everybody buys. This group behaviour, of course, brings quite a bit to the cryptocurrency volatility.
When will cryptocurrency volatility stop?
Generally, we can say that there will be a moment of crypto volatility decreasing. As time passes, we can suppose that there will more regulation, more investors and the market will mature generally. Also, there is a major point of use cases. As the market becomes more stable and evolved, a wider range of merchants will be ready to accept cryptocurrency (and do it conveniently). In case of all the points mentioned above coming to life, volatility of cryptocurrency will decrease. However, as a result, we can also expect a surge in the crypto market value as such. So far, the only answer we can give to the question of whether cryptocurrency volatility will disappear is “Time will tell”.