Cryptocurrency prices: Understand their volatility and the factors that influence them
May 4, 2023
The popularity of cryptocurrency is growing and has been for the past couple years. Since the advent of Bitcoin, in 2009, there are thousands of different digital currencies. Prices of digital currencies are volatile and fluctuate on a daily base. This article will explain the reasons why cryptocurrency prices are volatile and what factors affect them.
Factors affecting the price of cryptocurrency
1. Demand and Supply: The price of cryptos is also determined by supply and demand. Price increases when the demand for one cryptocurrency is greater than the supply. When supply is greater than demand, price drops.
2. Market sentiment: Investors’ and traders’ perception of a certain cryptocurrency may affect its value. Positive news or events such as the inclusion of cryptocurrencies in mainstream financial systems can drive market sentiment up and increase prices. In contrast, bad news like regulatory crackdowns may cause the market to lose confidence and prices to drop.
3. Adoption: Prices of cryptocurrency can be affected also by the adoption rate. Prices can increase as more organizations and individuals adopt cryptocurrencies.
4. Price changes can be influenced by new technology and innovation in the space of cryptocurrency. As an example, new blockchain technologies can enhance the safety and efficiency of cryptocurrency transaction, resulting in increased adoption.
5. A major influence on the market for cryptocurrencies is speculation. Many investors and traders purchase and sell crypto currencies with only the intent of making money from fluctuating prices. This type of speculative behavior can cause extreme price fluctuations.
Why is the price of cryptocurrency so volatile?
The high volatility of cryptocurrencies can be traced to many factors.
1. Inadequate regulation: Since cryptocurrencies are not regulated at all, their prices are subjected to extreme fluctuations. This is because authorities do nothing about it. Due to this lack of regulation, cryptocurrencies are also vulnerable to fraudulent and manipulative activities.
2. Lack of intrinsic values: Cryptocurrencies do not hold any intrinsic worth. The market determines their prices, which may lead to extreme fluctuations.
3. Limited liquidity. Many crypto currencies have a limited amount of liquidity. They are therefore not easy to trade for fiat money. Due to this limited liquidity, large purchases or sales can result in extreme fluctuations.
4. Hype and speculation. As we mentioned, speculation and hype are important factors on the cryptocurrency market. Hype around new cryptos or blockchain solutions may cause the price to rise, then to fall when the excitement fades.