Vital Factors that Determine Cryptocurrency’s Volatility

Key takeaways

Currency as a medium of monetary exchange has undergone a plethora of changes for centuries.
In yet another instance, in early 2018, the price of bitcoin and altcoin fell further, due to the hostility in the exchanges between South Korean and Chinese authorities.
Experts opine that changes in cryptocurrency prices may have a massive effect on the wider market, like how mortgage-backed securities lead to an economic downturn.

Currency as a medium of monetary exchange has undergone a plethora of changes for centuries. Ranging from coins to notes and now digital money, the concept has been through quite a transformation. The latest on this radar is cryptocurrency. Although crypt has been going around for a while now, it’s only in recent times that it has become a buzzword.

A cryptocurrency, in essence, is a virtual form of currency that people use to purchase goods and services. It deploys an online ledger embedded with strong cryptography to ensure that transactions conducted online remain safe and secure. Pretty much a major part of the interest in these unregulated currencies is used for trading.

According to popular market research firm CoinMarketCap.com, over 10,000 different cryptocurrencies are traded publicly.

Cryptocurrency – An Introduction #

As mentioned, cryptocurrency is a form of digital currency – a kind of payment that one can exchange online for goods. Many firms have issued their own currencies. These are called tokens, and they can be traded for the goods or services the company in question provides. This may sound very much like exchanging tokens for a ride at the arcade or obtaining chips for gambling operations at casinos. You have to note that you do need real, viable currency to exchange for the cryptocurrency so as to purchase the goods.

The concept functions by means of blockchain – a decentralized, highly secured technology that records crypt transactions. A blockchain is basically a public digital ledger that records transaction information and enables a secure way for people to deal with each other, sans the interference of a third party. This list of transaction records or blocks is connected using cryptography. Data once recorded cannot be changed.

Why Do Cryptocurrency Prices Change? #

Cryptocurrency is quite volatile, and the price of coins can increase or decrease unpredictably. Enlisted below are a few plausible reasons for sudden price fluctuations:

Investors locking profits #

When the prices of coins rise for a consistent period, investors may decide to start selling them. If many of them sell at the same time and lock in their profits, the price of the coil may drop dramatically.

Periodic upgrades #

Coins undergo periodic upgrades, such as a coin burn or a crypt fork. When this happens, prices may fluctuate, as the introduction of new features or similar impacts the confidence level that affects the coin price.

Change of Supply & Demand #

This is one of the most popular reasons for price change. In layman parlance, it’s referred to as ‘market manipulation’. Sometimes, when wealthy investors purchase or sell too many coins at once, there is a considerable alteration in the supply and demand dynamics. If less-priced coins are bought together, for instance, there would be a considerable change in the overall price.

News #

Cryptocurrency-related announcements on social media or online communities can have a considerable impact on the demand for coins. The announcements may pertain to new crypt initiatives, alliances, or team members. The reception of such news by the community can have a far-reaching impact on coin prices.

Hacking #

Despite blockchain being highly secure, hackers are still likely to compromise the system, which may lead to a fall in the currency.

Rumor Mills #

Rumors can majorly affect coin prices. Before a project team decides to make an official announcement, there are always rumors about what it entails. In consequence, people try to buy and sell based on these rumors, which may lead to the final price being either overwhelming or underwhelming.

Factors Impacting Cryptocurrency Prices #

Supply & DemandCryptocurrency prices are driven by how available they are. So the more it is available, the lesser its price. In contrast, the lower the supply, the higher the demand, and consequently, the higher the price.

The demand for a particular cryptocurrency depends a great deal on its popularity. Bitcoin, for example, is one of the most commonly known cryptocurrencies, yet, it has had volatile price fluctuations. In April 2021, Bitcoin hit USD 65,000 and fell rapidly in May, while in recent weeks it has picked pace and is valued at around USD 45000. 2. Mining DifficultiesMiners form a crucial part of determining cryptocurrency prices as they help verify transactions and create a secure network. If a cryptocurrency depicts difficulties when mining and consequently costs miners more, it disincentivizes miners to verify transactions. If miners are not a part of the process, the cryptocurrency is viewed as having lesser value as it holds less security.

This encourages investors to set a lower price for the cryptocurrency to compensate for their loss or the increased risk. Thus, the more the mining difficulties, the lesser the demand and lower the prices. 3. Fiat Currency InflationDuring inflation, the valuation of fiat currency increases, and its buying power is reduced. This consequently impacts the price set for cryptocurrencies such as Bitcoin.

For instance, if the valuation of a fiat currency reduces, the price of Bitcoin is likely to soar with respect to that currency. The reason for this is that you will be able to get more of that currency with Bitcoin. Political and economic events are likely to push investors to lose their faith in fiat currency, which encourages them to turn to cryptocurrencies, further pushing up their prices. 4. Mass AdoptionCryptocurrency has become a viable means of investment for many people due to the blockchain. As more and more people begin to adopt cryptocurrencies, their prices are liable to be set at a higher figure. Increasing public interest leads to higher demand, raising the price of crypt coins.

As long as cryptocurrency applications are subject to a suitable scaling of some sort, people are liable to depict consistent interest. As the application of crypt coins and recognition of the same becomes more commonplace, not to mention, the ease in the regulatory scenario, it will open up new streams of investments, triggering the public to adopt cryptocurrency and consequently raising its value. 5. ScamsCyberattacks and scams cause massive changes in cryptocurrency prices. Sometimes, even the team supporting a cryptocurrency may act as the scamming party – the latter increases the price to get more people to invest; once they do, the stammers reduce the prices. These types of scams make this market even more volatile.

When a new coin is subjected to scandal, it can be potentially derailing for the crypt exchange. As soon as it is known to be a scam, a kind of domino effect can occur; that is to say, its price quickly comes down – faster than ever in fact, as traders want to take home the profits they have already made. This kind of event does not just impact one cryptocurrency, but many like it. For example, a reduction in the value of Bitcoin can impact the entire cryptocurrency market. 6. News Related to the MarketNews can severely impact cryptocurrency prices. How one reports a piece of news majorly affects investors, who then decide to either pour in their coffers or withdraw from the race, depending on the news. Say for instance, if the media reports news about a crypt exchange scam, investors are likely to pull off their money from the exchange real quick. On the other hand, if the news pertains to a coins rising adoption, prices will see a major increase.

The impact of media frenzy and how it affects cryptocurrency prices is evident from several real-life instances. Take the instance of the ICO ban by China in September 2017. There was so much panic regarding the situation that the price of bitcoin fell from USD 5000 to USD 3000. In yet another instance, in early 2018, the price of bitcoin and altcoin fell further, due to the hostility in the exchanges between South Korean and Chinese authorities. On the other hand, NEO observed a rise due to the impact of positive coverage in China. 7. Coin UtilityThe usefulness of a coin is a major factor impacting cryptocurrency prices. Digital coins that have no practical use are seen as devalued currency. That’s why it’s vital to use the coins to buy something in the exchange. If utility is zero, the price of that coin will witness subsequent ramifications.

With regards to usefulness, another point to be taken into consideration is the extent of utility. There are, after all, numerous cryptocurrencies in the market today; many of them have very little value, solely for the reason that they are not unique; they do not bring anything different to the public. A significant number of them are merely duplicates of the popular bitcoin. The lack of a unique utility consequently reduces the market value of the cryptocurrency and its price deteriorates rapidly. 8. Fear factorManipulating the public through fear is a clever tactic to impact prices. Major market leaders leverage FUD (fear, uncertainty, and doubt) and FOMO (fear of missed opportunity) to control price rates. Ambiguity and fear usually lead to cryptocurrency prices skyrocketing. By leveraging the fear factor in the public, wealthy investors are able to swing the prices of cryptocurrencies. This forms the mood of the majority, which is able to encourage people to buy or sell their assets impulsively.

In the case of cryptocurrency, the fear factor can impact rather quickly, since the field is quite new to many people. With time, public sentiment may begin to have less of an impact as the market matures. However, presently, cryptocurrency prices have a huge chance of fluctuating due to the fear and uncertainly ingrained among the masses. 9. Economic parametersEconomic factors such as devaluation and inflation have a massive impact on fiat currency, leading to shaky financial stability worldwide. This leads to people looking for alternative investment methods, involving cryptocurrencies.

Although cryptocurrencies are popular, they are still not a centralized or non-volatile mode of monetary transactions. This makes it difficult to be considered as a reliable means in the economic system.

Unlike conventional financing, cryptocurrencies are not conservative in the way they function. For years, the conventional fiat system has remained the same in its approach – restrictions in conditions, centralized management, issues in micro-transactions, etc. Although the advent of new technologies can simplify certain internal structures, the basic principles still remain the same. Unlike the traditional approach though, cryptocurrencies have the ability to transform the economic system. 10. Security problems and bankruptcyAlthough blockchain helps secure crypt transactions, security problems still persist and can be one of the major factors influencing cryptocurrency prices. Closure of crypt exchanges and system breakdowns on wallet platforms may lead to holders losing millions of funds, leading to a market collapse.

Even if such events occur with a single exchange, they trigger off a chain reaction that can disrupt the entire market. The cryptocurrency industry runs across numerous exchanges, platforms, and wallets. A violation in code or operations even in any one of the systems may lead to a slight disturbance in the overall ecosystem. 11. Technological progressIncreasing technological progress may have a mixed consequence on cryptocurrency prices.

The introduction of new platforms and the requirement for anonymous, faster, and secure transactions may cause crypt prices to rise significantly. Not only will technological advancements make it easier and faster for users, but will make the business more transparent and efficient as well.

However, technological improvements may have a negative impact on crypt prices, depending on the existing market situation. As technologies pertaining to cryptocurrency become more developed and sophisticated, hacking methodologies are also on the rise, leading to more and more adverse events. 12. SpeculationSpeculation can either pull up the price of a product or destroy it completely. This is more of a may-or-may-not happen situation. Speculation can cause wealthy investors to invest millions and sell off instantly, raising the overall coin price or deflating it, leading to a huge imbalance.

As per observation, cryptocurrencies having small trading volumes are subject to speculation the most. A lot of speculative investors hope to make money out of cryptocurrencies, and may accordingly buy and sell quickly, causing a profound impact on the market. 13. Internal CompetitionThere are plenty of new entrants in the cryptocurrency market. The advent of new, advanced technologies in the market usually impacts the demand for older ones. So far, bitcoin has been a leader in the industry. However, it does have a rigid protocol and if that is not dealt with sooner or later, the network may reach a critical point. This will lead to individual cryptocurrencies taking center stage.

Say, for instance, there are already many alternatives to Ethereum that not only provide solid platforms for blockchain projects but also provide scaling opportunities. The more these appear by the day, the more internal competition there will be, leading to massively fluctuating prices. 14. RegulationThe presence of a stringent regulatory spectrum and its changing norms majorly impact cryptocurrency prices. Changes in regulation and corresponding announcements can raise or reduce crypt valuations. For example, in April 2017, Japan announced the legalization of bitcoin which led to a 3% rise in the bitcoin value in a day, hitting USD 1,130.

The change in a political regulatory framework can deliver a crushing blow to the cryptocurrency market. Say, for instance, the ban on crypt mining in China. Ideally, the mining sector in this country has a huge share in the total number of pools. This means that quite an amount of capital is concentrated here, but due to the restrictions in regulations, this has led to considerable market imbalance and stagnancy in the regional cryptocurrency industry.

How Do Changing Crypt Prices Impact The Global Market? #

Cryptocurrencies have a global appeal. Although they are more commonly used in the U. S. and certain other developed nations, they are slowly cropping up to be a vital investment avenue across other countries worldwide as well. Fluctuating cryptocurrency prices will thus impact the investment portfolio of all the people buying crypt coins. At the end of the day, there is a dependency on fiat currency to buy crypt coins, and fluctuations in global economic stability will impact the cryptocurrency market as well, which in turn will affect conservative investment methods, creating a never-ending vicious cycle.

Despite their popularity, the response to cryptocurrency as a payment medium has been a little less than cold. Some organizations worldwide are supportive; the majority, however, including central banks, treads on eggshells around cryptocurrency, given the extremely volatile nature of the market. There have also been issues with tax evasion and similar problems that have led to concern regarding their mainstream adoption. Experts opine that changes in cryptocurrency prices may have a massive effect on the wider market, like how mortgage-backed securities lead to an economic downturn.

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