What causes crypto to rise and fall? Why is crypto so volatile? If you have ever found yourself asking these questions, then keep reading to find out the reasons why crypto can be so unstable.
What is a cryptocurrency?
A cryptocurrency (or cryptocurrency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Cryptocurrencies use decentralized control as opposed to centralized electronic money/central banking systems. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database. Bitcoin, first released in 2009, is generally considered the first decentralized cryptocurrency. Since then, over 15,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.
Cryptocurrencies typically run on a blockchain, which is a public transaction database, functioning as a distributed ledger. Decentralized cryptocurrencies are produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. However, in decentralized cryptocurrencies, companies or governments cannot produce new units and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it.
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. This activity is called mining and miners are rewarded with transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for different currencies, products, and services. Users can send and receive bitcoins electronically for an optional transaction fee using wallet software on a personal computer, mobile device, or web application.
5 things you should know about the crypto market
- When you buy a cryptocurrency, you’re not actually buying it from another person, but rather from a centralized exchange. Cryptocurrency exchanges are centralized marketplaces that buy and sell cryptocurrencies on behalf of their customers. The volatility in these exchange rates can result in upswings or downswings of 50% in a single day. This means that if you buy cryptocurrency today, and it falls by 50% tomorrow, your investment will have dropped dramatically just by changing hands. Because crypto exchanges list prices based on order books (where people bid on what price they’re willing to pay for cryptocurrency), there can be stark differences between exchange rates for one currency pair at different times throughout the day; sometimes even within a couple of minutes.
- Crypto trading platforms also add an additional layer of volatility to crypto markets. These platforms allow traders to place bets on whether crypto prices will go up or down over time, allowing them to make money when their predictions come true. Some platforms only allow users to bet on whether crypto prices will go up or down over time—while others let them bet both ways (called long and short positions).
- Many countries restrict access to cryptocurrency trading platforms—and therefore affect market stability as well. For example, China has banned its citizens from using local exchanges—making Chinese investors less likely to invest in digital currencies like Bitcoin because they can’t use them easily as a store of value. As a result, many Chinese investors turn to foreign crypto exchanges to buy and sell crypto assets.
- Crypto exchange hacks are becoming more common—and wreak havoc on crypto markets. In January 2018, the Japanese cryptocurrency exchange Coincheck was hacked and lost $530 million worth of NEM coins (the equivalent of $424 million USD)—resulting in a massive drop in NEM coin prices across all major exchanges globally.
- Since cryptocurrencies aren’t backed by any physical assets or central banks, their values tend to fluctuate wildly depending on supply and demand at any given moment in time.
4 reasons why we keep seeing sharp rises and falls in crypto prices
To be frank, it’s all about market psychology. But that doesn’t necessarily mean investors are acting irrationally. Often, there are at least four reasons why we keep seeing sharp rises and falls in crypto prices:
1 – Fear of missing out (FOMO): Crypto markets have been very cyclical over time, so it’s natural for investors to jump in when they see others making money. With emotions driving more investment decisions than fundamental factors, once prices start moving up it can become a self-fulfilling prophesy of higher prices as everyone jumps on board. This leads to…
2 – Herd mentality: When investors buy something because other people are buying it, it’s called a herd mentality. It happens quite often in crypto markets because new investors tend to follow what those who came before them did—even if their approach isn’t rational or grounded in facts. This leads to…
#3 – Market manipulation: While not common, there have been instances where big players with deep pockets manipulate crypto prices by dumping large amounts of coins onto exchanges. When these whales do so en masse, they create artificial sell pressure that drives down prices artificially low—and then buy back their coins when no one else wants them anymore. This leads to…
4 – Short selling: If you think crypto prices will go down, you can borrow some coins from someone and sell them on an exchange. Then, you wait until their value drops enough for you to pay back your debt plus interest. The difference between what you paid for them and how much you sold them for is your profit. If crypto prices drop significantly lower than where they were when you bought them, your profit could be huge! However, if crypto prices don’t drop enough, then your loss could also be substantial. In order words, short selling makes volatility worse since it creates negative feedback loops which feed into itself creating larger price swings even though its purpose was to reduce volatility!
With all of these factors in play, it’s no wonder why we keep seeing sharp rises and falls in crypto prices. So, are crypto prices truly irrational or was crypto created by a bubble doomed to burst? A little bit of both—and that may be okay! If you’re still having trouble making sense of crypto markets, one thing you can count on is that investor psychology will continue playing a key role in determining how price changes unfold from here.
Don’t Fear The Boom–Bust Cycle, Love It!
Volatility is like a box of chocolates, you never know what you’re going to get. By that we mean, that no matter how much research you do or how knowledgeable you are in crypto, you can never predict when prices will rise or drop — it’s impossible. And even though crypto may seem especially volatile at times, it’s really not that different from other assets that trade on supply and demand, with pricing influenced by speculation. However, as we’ve said before: Don’t confuse volatility with risk. You can have high volatility without taking on any risk at all. Crypto Volatility Index tracks Bitcoin price volatility over time.
When it comes to making money in crypto, you have a few options at your disposal. The first is day trading. In layman’s terms, day trading means buying cryptocurrencies today with an aim of selling them off for profit later on — potentially even minutes later if it’s a particularly volatile day. For example, you might want to speculate on bitcoin price movements by buying bitcoins when their value drops, then wait for bitcoin prices to go back up again before selling them off for a profit! Alternatively, you could take a long-term approach and HODL. HODL stands for hold on for dear life in crypto trader parlance.
A word on regulation
Stablecoin (or price-stable cryptocurrency) is a type of cryptocurrency that can help reduce volatility in other cryptocurrencies. It does not suffer from traditional roller coaster-like price swings as its value remains stable through market shifts. This means it can be used as a medium of exchange without having any huge loss in value when transferring into or out of cryptocurrency or fiat currency. A word on regulation: In order for stablecoins to really take off, they need regulatory approval and trust. Like with Bitcoin at first, most governments don’t like them because they are anonymous transactions. Many governments believe these coins may facilitate money laundering or other forms of illegal activity, which is why they are often difficult to get in one country but easy to use in another.
One stablecoin called Tether has created a whole new way of thinking about cryptocurrencies. Instead of creating an all-new coin, they’ve developed a process for creating tokens based on Ethereum’s ERC20 token standard. This allows you to exchange your US dollars or other national currencies for an equivalent amount of USDT (tether) on their platform. Since tether always equals $1 USD, it works like cash in that it won’t lose value even when Bitcoin or another cryptocurrency drops significantly in value. Since many exchanges don’t accept fiat currency deposits directly, stablecoins like tether can be great for moving large amounts into cryptocurrency without high transaction fees.
With a market cap of nearly $200 billion, it’s no wonder people are concerned about cryptocurrency volatility. While bitcoin has historically been the most volatile asset in any given year, others like Ethereum or Litecoin have also seen substantial volatility. Cryptocurrency volatility ranking is based on comparing one cryptocurrency against another. Even though bitcoin remains one of the most well-known names in cryptocurrency, each one has its own set of risks that impact its long-term value. Even if you believe bitcoin will rebound next year (or just won’t go down), you still need to understand what affects crypto volatility and why your portfolio may see some drastic changes from day to day – which may make investors hesitant about putting their money into crypto in 2018.
If you’re interested in investing in cryptocurrencies, it’s wise to be prepared for potentially significant changes in value. While many people are already aware of cryptocurrency volatility, there are a few factors that could cause values to rise or fall even more. One common reason for increased crypto volatility involves external factors like regulation and security issues with exchanges. Some countries have banned bitcoin entirely due to concerns about money laundering or other potential crimes, which limits access for everyone in those regions. In some cases, exchanges have been hacked as well, which can lead traders to pull out their assets entirely when they feel insecure about their financial information being exposed. In 2017 alone, more than $500 million was stolen from cryptocurrency-related businesses because of hacks.
When it comes to cryptocurrency volatility, there are also some things you can do on a personal level. Before you start trading, it’s important to pick an exchange that allows you to withdraw your assets in fiat currency whenever you want. Some exchanges let users buy cryptocurrencies with their credit cards or allow them to immediately exchange assets like bitcoin for other cryptos. If you need quick access to cash during an emergency, these options could be crucial for protecting your money in a volatile market.