Though investing in cryptocurrency may give high returns quickly, a few investors are still contemplating or avoiding to invest in the crypto world. It is because of the highly volatile nature of cryptocurrency. Since the beginning, the crypto market has been unstable, and for the past few years, its volatility has increased more.
Several people got huge profits, while some investors have to face vast investment losses due to the sudden change in the market. Have you always been curious about the volatile nature of cryptocurrencies? In that case, it is better to read this guide as we will talk about the reasons for crypto volatility.
Top 7 Reasons Explaining Why Cryptocurrencies Tend To Be Highly Volatile
You can also create a crypto account to start trading. There are several reasons that contribute to the sudden crash and gain of crypto value in the cryptocurrency world. However, we have included only the primary factors. Check out https://bitcoin-prime.app/ in order to know more about how cryptocurrency has started, its current value, and much more.
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Price Speculation
In general, the crypto market rises on presumption. People who invest in these digital currencies speculate whether the cost of that specific coin will increase or decrease. After that, they will buy the crypto, which they think will give them a chance to get more profits. Because of these assumption bets, there can be an abrupt inflow of price or an unexpected reduction in the value. Hence, the whole crypto market will become unstable.
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Solely Digital Asset
All cryptocurrencies are entirely digital assets. From the first cryptocoin, which is Bitcoin, to the new altcoins, every single crypto is a digital investment that does not have any form of physical product or money. It indicates that the crypto coin price will totally depend on the entire supply and demand in the market. Due to the lack of stabilizing aspect, there might be sudden fluctuations in the price of cryptocurrencies, making them volatile.
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Absence Of A Regulating Body
If you take any other kind of assets, they are controlled by a different body, either government or private companies. Contrary to that, cryptocurrencies do not have any regulating body, and they operate solely on blockchain technology.
Even in any country, crypto coins do not possess any kind of regulatory framework to which they can belong. Because of this factor, some people like to invest in crypto, while others tend to avoid it. For instance, if you send crypto coins to the wrong wallet address, there is no agency or an organization to complain or ask to transfer these digital coins back to your account.
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Investing By Following Emotions
When a new crypto coin enters the market, many people will not dare to invest in it. However, if that cryptocurrency grows, then people will immediately start investing in it. Due to the sudden increase in the total number of buyers, the crypto market becomes highly volatile.
In addition to that, if a famous personality has invested in a specific crypto coin, then other people will also buy it in fear of being left behind. A few investors trade cryptocurrencies based on their mood, which can sometimes give them more profits. However, trading by relying on emotions will mostly result in heavy and unrecoverable losses.
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Limited Supply And Major Holdings
Opposite to real money, several crypto coins have a limited supply. Here is a brief list of a few crypto coins with limited supply:
- Bitcoin – 21 million BTC
- Binance Coin – 200 million BNB coins
- Chain Link – 1 billion LINK coins
- Cardano – 45 billion ADA coins
- XRP – 100 billion XRP coins
- Avalanche – 720 million AVAX coins
- Algorand – 10 billion ALGO coins
- Litecoin – 84 million LTC coins
Like we said previously, crypto coins are completely digital assets, so they do not have any specific price. Depending on the demand and supply, their value increases. As the coins have limited supply, a few organizations tend to keep major possession of that crypto coins. Because of this influence, these digital coins might surge and decline in their value, so the entire market becomes volatile.
Many people wonder about what will happen to the crypto market when all the available coins are already bought by investors. There are two possibilities: the coin demand will increase, making it more expensive, or its market value will drop if people show interest in other crypto coins.
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Not Fully Developed Technology
It is clear that blockchain technology or specific alternatives operate all cryptocurrencies. However, blockchain technology is still expanding and is not completely developed. Due to that, there might be systematic changes in the blockchain, and investors may need time to get used to the new changes.
The first cryptocurrency is Bitcoin, and it was released to the public in 2009 which runs on blockchain technology. As you can see, it has only been a few years since crypto trading has started. Besides that, scalability is another issue with the crypto market. For instance, if a smart contract is not verified within the given duration, it may develop an abrupt downward pressure.
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Unstable Investors
In contrast to the secured stock market or real estate, crypto investors do not have and do not need much skill. Thus, several people who invest in these digital coins are primarily part-time workers, university students, and others who wish to get more profits by short-term investments. So, when they do not get expected profits, they are likely to withdraw the funds from the crypto coins. As people continuously buy and sell coins, the crypto market tends to become unstable.
Bottom Line
Compared to any other investments, crypto trading is relatively volatile, and we have listed all the possible reasons for it. Despite its volatile nature, the crypto world is expanding day by day. Besides that, there is a high spike in the total number of investors from recent years because crypto coins give high profits in a short period.