Volatility is the way to measure the variation of an asset. This means that the greater the variation in the price of a share, the greater the risk of making or losing money in transactions. It can be used in a variety of contexts, but is most commonly used as a financial characteristic. The expression is especially said in the world of cryptocurrencies. In this sense, it is possible to identify some factors that interfere with the value of cryptocurrencies, causing volatility.
Table of Contents
market condition
The cryptocurrency market continues to adapt, becoming more useful and attracting investors and novice speculators. Demand and supply are not stable. The pressure of information, such as negative news, provokes a strong reaction. The market size is still relatively small, so any problem has a big influence on the market as a whole.
low liquidity
Liquidity is the ability to sell an asset at any time for a good price. This requires many active investors in the market offering bids. However, with the strong price fluctuations and the underdevelopment of the market, it seems impossible. High volatility is a consequence and one of the reasons for the low liquidity of cryptocurrencies.
News
The media, the anticipation of certain events and rumors have a great impact on the prices of traditional financial instruments. In that sense, cryptocurrencies are similar to them.
Lack of a legal framework
Cryptocurrency regulation is still discussed and adopted into basic law in most countries, but there is already a crackdown in some jurisdictions. This still offers opportunities for scammers and speculators, in addition to legal uncertainty that prevents the interest of large investors.
lack of real value
Exchange rates are linked to trade in products, factors of production, macroeconomic statistics and other indices. Stock prices are linked to the financial performance of companies. Crypto rates are linked to current demand for specific currencies and globally to demand for Bitcoin.
market cycles
The volatility of some cryptocurrencies is cyclical and is linked to their halvings. Whereas, this is most evident in Bitcoin: Just to illustrate, after the first halving, the price of Bitcoin was $11, then it surged to $1,100 before dropping to $200. it traded for around $600, before rising to nearly $20,000, and finally dropping back to $3,500. The third halving took Bitcoin at $8,500. About a year and a half passed and the price established a new high around $69,000, then another decline began.
In this way, the fluctuating nature of Bitcoin’s volatility can help traders profit by making predictions. In this way, high volatility can be perceived as a beneficial factor.
Will cryptocurrencies be volatile in the future?
Despite the volatility, the cryptocurrency market is growing. States discuss legal regulation. Major media figures invest in cryptocurrencies. The factors described above indicate the development of the cryptocurrency market, which sooner or later will lead to a decrease in the volatility of cryptocurrencies in general. Ultimately, it is impossible to predict what will be the main driver of volatility falling or when exactly this might happen and on what scale.
