The volatility of cryptocurrency
Cryptocurrency is volatile and can run in two ways. Simply put, if crypto prices drop drastically one day, it doesn’t mean they’ll continue. However, that also doesn’t mean they’ll rise. To invest wisely in cryptocurrency, buyers must acknowledge its volatility.
But why is cryptocurrency so volatile in the first place?
The cryptocurrency market is just getting started
Cryptocurrency is volatile, in part, because it’s relatively new. Unlike assets that have stood the test of time and are now subject to fewer fluctuations, new currencies are greatly impacted by a number of external factors we’ll explain below.
On the contrary, stocks were also considered volatile back in the day, although that’s still prevalent. Investments in stocks came with their own set of risks. In other words, the world is still figuring cryptocurrency out, and it’s in the price discovery phase of its development.
Why should investors consider crypto’s volatility?
You may be thinking twice about investing in cryptocurrency while it’s still in the aforementioned discovery phase. It can help to think about the long haul. Right now, while societies are still working to understand crypto, your holdings may spike and drop.
However, it’s possible that once the world collectively adopts these digital currencies, they can have the potential to stabilize as other assets, like gold or the U.S. dollar, have over time or even hit an all-time high point.
These are all things to consider as an investor. As an emerging space, there’s much to be discovered about cryptocurrency. This results in significant shifts in market value depending on investor sentiments and the effects of decentralization.
Investors must accept cryptocurrency’s volatility when investing and not get too emotional about rises and falls. Presently, this is the nature of cryptocurrency, which is why investors should ultimately consider its volatility.
What determines a cryptocurrency’s value?
There are no universally relevant factors that apply to every cryptocurrency. In truth, a cryptocurrency’s value depends on that particular currency. However, a few common factors include:
A cryptocurrency's underlying technology plays a significant role in determining its value. Blockchain technology is universally prevalent and necessary for any cryptocurrency to function and usually operates on a consensus mechanism like a proof-of-work (PoW) or a proof-of-stake (PoS) protocol. This makes them censorship-resistant, free from intermediaries, and almost impossible to terminate.
Blockchains are reinforced through nodes, which are computer systems that are part of a larger global interconnected network. The number of nodes on a blockchain is a reliable measure of a cryptocurrency's value.
A cryptocurrency's blockchain node count shows how many active crypto wallets present on the blockchain are searchable online for transparency purposes. A node count also reflects how active a crypto community is, where a higher note count results in a stronger community.
Large cryptocurrency exchanges have improved crypto usability, leading to a significant rise in overall market valuation in recent years.
As a result of their growing acceptance and appeal among businesses, an increasing number of organizations—and even countries—are attempting to figure out ways to embrace cryptocurrencies as part of their financial systems. This is easier said than done, and numerous countries have reservations against crypto, but there are efforts by some governments.
Cryptocurrencies, by design, have shown they can act as a hedge against inflation. For example, a fiat currency's value can decline, leading to an increase in Bitcoin's (BTC) value. This occurs because you'd be able to buy more fiat currency with the same amount of BTC.
Many governments and central banks have been producing fiat currency like USD at an increasing rate while maintaining low interest rates, showing how inflation is present and dominant in today's global economy.
What causes cryptocurrency to go up and down?
The best way to embrace change is by having all the facts you need to make smart decisions. This may sound like decent life advice, but it’s also intelligent investing logic. The following factors cause cryptocurrency price fluctuations, and if you stay up on these movements, you may become better at predicting (or at least understanding) what’s in store for your crypto wallet.
Basic supply and demand
Bitcoin’s inventor Satoshi Nakamoto placed a cap on Bitcoin’s production, i.e., 21 million units. Limited commodities are often hot commodities. So as Bitcoin becomes scarce, the price can climb, thanks to the demand for the units in circulation.
Cryptocurrency is a trending topic. Influencers, businesspeople, and financial experts are all talking about this new way of investing. While the information on your social media feeds or even the news may not always be correct, it is influential. FUD (fear, uncertainty, death), as they say, moves markets.
Public opinion about Bitcoin changes the way people invest in it. If you read about an investor hitting big with cryptocurrency, it can influence your decision to buy. If a source you trust predicts a downturn, it may cause you to sell.
World events affect all currencies. In an intricate global economic network and an increasingly connected planet, current events in one geographic area can impact investors elsewhere. Uncertainty and economic crises not only affect the price of resources and the weight of traditionally traded money (known as fiat currency), but they also hit cryptocurrency.
Significant actions of investors
There are some cryptocurrency power investors out there—so big that many of us know them by name. And these investors (called “whales”) control a good deal of the available coins, which means that their actions affect us all. If a whale makes a huge sale, it sparks questions for other investors, potentially causing them to follow suit and spur a decline in the price of bitcoin or other digital currencies. The same logic holds if someone buys huge sums of a specific cryptocurrency.
Part of what investors love about cryptocurrency is that it’s an unregulated digital asset in many countries. Deregulation is a key characteristic of this currency, as much as volatility is. So investors may spook at rumors of Bitcoin regulation and a proverbial end to the party, causing a price drop.
Another key consideration is tax. In many places globally, cryptocurrency gains form part of your taxable, reportable income. As with any other investment return, you may have to turn a cut over to your country’s tax agency.
How to take advantage of cryptocurrency’s volatility
As cryptocurrency is inherently volatile, there’s not much you can do to control it. When an issue is out of your hands, one of the best tactics is to sit tight.
Remember, in the long term, the value of a given cryptocurrency can continue to rise if it becomes scarce. However, there’s an equal chance that the same cryptocurrency can plummet in value due to the factors mentioned above. As they say, with cryptocurrency, you win some, you lose some.
Another piece of information that’s worth remembering is the importance of diversification. Cryptocurrency is just one type of investment, and if prices drop while the rest of your assets remain stable, it can stabilize your anxiety.
Finally, consider what your cryptocurrency can do for you. It may be a great investment or a currency that you can spend on select items, but it’s unlikely that your local grocery store will accept it (for now). So, even if you invest heavily in crypto like Bitcoin and Ethereum (ETH), retain your liquidity. Having cash on hand can help you weather the storm of fluctuations in the other currencies and assets you hold.
Cryptocurrencies are undoubtedly volatile digital assets. As a result, it can be risky to spend your hard-earned dollars buying cryptocurrency that can fall in value a few hours later.
But what if you didn’t have to spend any money and could receive cryptocurrency for free? At Worldcoin, we aim to do just that. We’re giving away a share of our cryptocurrency for free to every individual on the planet. At the same time, we value your privacy and understand the importance of anonymity and safety in the world of cryptocurrency. Subscribe to our blog to know more about the crypto market.