In December 2020, Bitcoin’s price was around $20,000. By January 2021, the value reached $40,000. Again, by April, it was $65,000. Things were looking great for Bitcoin investors. The trade was going as smoothly as possible, and profits were frequent. All of a sudden, things took a turn for the worse.
Bitcoin’s price volatility caught up with its traders. From May to June, its price dropped below $30,000. The transactions became more frequent because of the low price, but profits also dropped.
The above scenario explains one of the most quintessential traits of the cryptocurrency landscape – volatility.
Before you purchase cryptocurrency from an online platform, you should know that crypto prices are unstable. One moment the cryptocurrency prices are high, and the other, they fall hard.
So, it is always wise to buy cryptocurrency based on its market cap. Many cryptocurrency exchanges highlight both the market cap and the cryptocurrency value. Also, they let you buy crypto with a credit card and even convert cryptocurrency to fiat.
However, deciding to trade based on the crypto market cap is a better idea. In this blog, we’ll delve deeper into the crypto space and understand the reasons behind its volatility. Let’s get started.
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How Volatile is the Cryptocurrency Landscape
In case the earlier story didn’t give you an idea regarding the volatility, here is a more recent example.
Between January and April this year, Bitcoin’s market value has been around $36,000 to $39,000. However, the market cap has stayed almost the same at $750 billion. The fluctuations exist for both market cap and value. Yet, it is only the cryptocurrency value where' the fluctuation is most noticeable.
That is why experts advise traders to invest in crypto based on their market cap. Buying cryptocurrency based on market value can lead to losses. In many cases, you’ll notice a new cryptocurrency with a high value.
However, its initial market cap is low. So, eventually, that crypto has less chance of sticking around if it fails to keep its prices high. Besides, these new crypto projects could even be scams. It’s always a good idea to check the whitepaper of any new cryptocurrency project before investing in it.
Having said all that, we now need to know what’s causing this volatility in the world of cryptocurrencies.
Explaining the Volatility
Volatility in the crypto landscape has been around from the beginning. It didn’t happen overnight, nor is it an isolated event. It existed before and still does today. Given the current situation, volatility will forever exist. So, what causes this volatility in the cryptocurrency market?
There are a few factors responsible for its volatility. However, here are some of the most noteworthy ones:
1. It is an Emerging Market
Cryptocurrency has been around for years now. However, it’s still a relatively new and emerging market compared to other assets. While its rapid growth in popularity has helped gain interest from investors, cryptocurrency prices will still need time to settle down.
Meanwhile, people who hold large amounts of cryptos will influence trade. Unlike gold or traditional currencies, even a small disruption by these big traders can turn the landscape upside down. Thus, they have what it takes to manipulate or crash the market by simply making extreme crypto trades.
That makes it difficult for analysts and investors to predict where' the world of crypto will head in the near future.
2. Speculation
Cryptocurrency projects thrive on speculation. As an investor, you have to bet whether or not prices will go up or down. Getting it right is the only way you can make profits in this scenario.
Such speculative bets bring in a sudden influx of money into the market. They can also cause a sudden outgo. These situations lead to high volatility in the cryptocurrency market.
3. No Backup
Cryptos like Bitcoin and Ether are digital assets in your digital wallet. No national reserve or any physical commodity is backing them up. So, cryptocurrency prices depend entirely on supply and demand.
Supply and demand govern almost every commodity we know and use. These basic economic principles dictate product prices as well as stock quantities. It’s not surprising that supply and demand also impact the digital world of cryptocurrencies.
Since there is no stabilizing factor, like government or international backing, nothing oversees the demand and supply. As a result, crypto is exposed to volatility and all sorts of uncertainties.
Even a seemingly harmless tweet by Elon Musk can cause cryptocurrency prices to nosedive. As a decentralized market, this is perhaps one of the greatest problems of cryptocurrencies.
A clever way of working around this uncertainty is to invest in a stablecoin, such as Tether or Dai. Unlike regular cryptocurrency, the value of a stablecoin is pegged against fiat currencies like USD. That makes it less susceptible to volatility.
4. Part-time Investors
The cryptocurrency market became popular within a short time. Seeing the possibilities, many entered the market and invested huge sums of money in it. Many then left over the years. This is happening even today.
As a result of these part-time investors, the market experiences large sums of cash coming in and going out. When the frequency of this increases, itexperiences volatility.
That highlights the importance of being cautious about purchasing or investing in new crypto projects.
In Conclusion
Volatility will continue to exist in the crypto market. However, don’t let it stop you from trading. Approaching it carefully and trading at appropriate times will help you avoid the consequences of this volatility.
Make sure you carefully study the crypto market and familiarize yourself with various factors that cause fluctuations and cryptocurrency value. Also, it’s a good idea to invest only what you can afford to lose.
Lastly, remember that it’s wiser to invest in a new cryptocurrency based on its market cap. While crypto values can go through noticeable ups and downs, the market cap remains constant.
