Understanding the Volatility of the Cryptocurrency Market

Cryptocurrencies are the future, don’t let the volatility put you off.

 

Cryptocurrencies have dominated the financial industry in recent times, especially in the last year. The incredible hike in value of almost all cryptocurrencies took the world by storm and made them the most viable investments for many. However, the fluctuating prices have been of big concern to many people, especially novice investors who are now afraid of investing their hard-earned money, only to “lose all of it when the price plummets.” The fact that many investors are not fully conversant with how cryptocurrencies work has only made matters worse.

 

Many pessimists have taken the opportunity to spread malicious lies and propaganda about cryptocurrencies, including labeling them as Ponzi schemes. The volatility of the cryptocurrency market should however not be taken as a sign of weakness, but as a natural cycle of any financial market.

 

Why is the market volatile?

The volatility of the cryptocurrency market is contributed to by many diverse factors, all of which affect the price differently. They include:

 

Bad Press

There are many among us who are still pessimistic about cryptocurrencies and who are still not fully convinced that this is the future of finance. This makes bad press one of the biggest contributors to the volatility of the cryptocurrency market. Once any significant event related to cryptocurrencies takes place, many people start panicking and begin selling their coins in massive amounts. As with any other financial market, sudden sale automatically drives the price down. The majority of the people who sell their coins are those who don’t fully understand cryptocurrencies and thus are easily spooked.

 

Recently, the government of India through their finance minister announced that Bitcoin and other altcoins were not recognized as legal modes of payment. This was incorrectly reported as the government of India banning cryptocurrencies in the Asian economy, which led to widespread global panic and a great portion of Bitcoin holders selling their coins immediately anticipating a market crash. The market value plummeted but has since begun the recovery.

 

Security Breaches

This is another factor that has greatly contributed to the volatility experienced in the cryptocurrency market. Cryptocurrencies are mined, transacted and exchanged digitally which makes them prone to hacking attacks. The most targeted have been cryptocurrency exchanges, with some of the hackers making away with millions of dollars worth of coins. These security breaches make many wary of investing in cryptos and those who already own them dump them in masses. This automatically leads to the price of the cryptos falling dramatically.

 

Government Regulations

Most governments are yet to come up with clear guidelines and laws to regulate cryptocurrencies. Those that have formulated laws to regulate this market have sometimes caused uncertainty in the market with many investors unsure of how the market is going to respond. Some of the governments that have been involved include the US government, which launched a crackdown on cryptocurrency startups it considered fraudulent, the Chinese government, which banned exchanges, and the Indian government, which is setting up a taskforce on cryptos. The unease such regulations bring to investors ends up reflecting on the price of the cryptocurrencies.

 

This is absolutely normal.

The fluctuations in the cryptocurrency market should not strike fear but should give people renewed confidence in this revolutionary innovation. This is because these fluctuations indicate that the market is maturing and even when the price plummets, it picks up again and in most cases even rises higher than it was. This is indicative of a healthy market.

 

Fluctuations in any financial market are normal, regardless of how stable the market seems. The stock market is a good example that has plummeted multiple times in history but has managed to rise again. In 1908, the New York Stock Exchange fell by over 50% due to the manipulation of copper prices. It picked up and thrived after. Wall Street crashed in 1929 after some of the innovations that had pioneered its success such as radio and automobiles suffered a major breakdown. It however recovered and continued to thrive after this depression.

 

Bitcoin, being the dominant cryptocurrency has experienced its fair share of fluctuations. Bitcoin has “died” 250 times, but it has come back every single time.

 

Biggest crashes in Bitcoin history:

-94% June-November 2011 from $32 to $2 – MtGox hack

-36% June 2012 from $7 to $4 – Linod hack

-79% April 2013 from 266 to 54 – MtGox stopped trading

-49% February 2014 – MtGox is gone

-40% September 2017 from $5000 to $2972 – China ban

-48% January 2018 from $19700 to $9500 – Korea FUD

 

The future belongs to cryptocurrencies

Cryptocurrencies have already caused a major shift in the financial industry and will continue to do so. The blockchain technology that powers them has especially been revolutionary in the financial services sector. From cutting costs of transactions to just a fraction and reducing the transactional time from days to seconds, the impact of cryptocurrencies is being felt deeply.

 

Minor fluctuations in the price of cryptos should not take away the confidence that people have developed in cryptos. The future belongs to cryptocurrencies and very soon, the world will be run by Bitcoin and all the other altcoins.

 

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