Understanding the Volatile Nature of Cryptocurrencies

Understanding the Volatile Nature of Cryptocurrencies

Written by Ramsay, In Crypto, Updated On
January 17th, 2024

Volatility is one of the major concerns of new cryptocurrency investors, but it is also the focus of seasoned traders looking to capitalize on small and big shifts. The dramatic price swings in major cryptocurrencies like Bitcoin are absent in any other investment. For instance, the price of Bitcoin went from a $37,970 peak to a $34,630 low before stabilizing at $36,500 in just one week in November 2023. Interestingly, this is a common phenomenon, with Bitcoin value known to rise and fall thousands of dollars within days. Understanding the volatile nature of cryptocurrencies can help inform your decision to trade or sell or continue watching emerging developments.

How Supply and Demand Affect Volatility

volatile nature of cryptocurrency

Supply and demand shape the prices of most commodities, including cryptocurrencies. The price of any cryptocurrency is directly impacted by the number of coins in circulation and the amount people are willing to pay. Cryptocurrencies like Bitcoin have high demand, reflected by their dominance in online casinos and eCommerce outlets. Most modern casinos accept and encourage cryptocurrency transactions, with some featuring exclusive bonuses for crypto deposits. The preference for crypto stems from its many benefits, which include security, convenience, ease of use, and global availability. Despite the high demand, Bitcoin’s supply is restricted to 21 million coins. As circulation gets closer to the limit, Bitcoin prices are expected to climb. However, it’s daunting to project what will unfold when the limit is reached, other than the end of Bitcoin mining.

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Volatility and the Actions of Bitcoin Whales

Big financial players continue to compete for ownership as supply dwindles, so prices will likely fluctuate in response to their actions. These investors, known as Bitcoin whales, have BTC holdings worth over $10 million. If they start liquidating significant portions of their holdings into fiat, it would send panic throughout the market, partly because prices would plummet. Investor panic would cause further price dips, and more people would try to liquidate their assets. However, crypto exchanges have daily limits on how much can be liquidated. In most cases, the maximum is $50,000, which means investors can only liquidate one coin per day if prices hit the $50,000 mark. Investors with thousands of coins will thus suffer enormous losses if prices plummet rapidly due to the actions of Bitcoin Whales.

Countering Volatile Cryptos with Stablecoins

Although Bitcoin, Ethereum, and Dogecoin prices are known to fluctuate dramatically, volatility isn’t an inherent characteristic of all cryptocurrencies. There’s a whole category of cryptocurrencies designed to deal with the issue of volatility. These are known as stablecoins. Examples include Tether, USD Coin, Binance Dollar, and Euro Coin. Stablecoins offer the flexibility of conventional cryptocurrencies like Bitcoin while maintaining the price stability of fiat currency. The value of a stablecoin is fixed, usually on a 1:1 ratio with the US dollar. As such, the value of a single coin unit must match the value of one dollar. This pegging bridges the gap between volatile crypto and stable traditional assets, providing more excellent price stability. However, stablecoins feature meager profits for small investors.

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Regulatory Landscapes and Price Fluctuations

No universal legal or regulatory framework governs cryptocurrencies. Every jurisdiction is left to its own devices, but this could change. Regulation rumors about legislating the use of Bitcoin and other volatile cryptocurrencies can cause short-term price fluctuations. However, the significance of such impacts is debatable. Government views on cryptocurrencies vary from place to place. In the US, Bitcoin is considered a virtual currency convertible to cash, a capital asset usable as an investment instrument, and an income if mined. In China, all cryptocurrency transactions and facilitations became illegal in 2021, leading to the crackdown that caused the massive shutdown of mining firms. Bitcoin prices dropped to below $30,000 as miners relocated to find new grounds where cryptocurrencies were legal. After things calmed down, prices shot back up.

The Role of Media Hype in Crypto Volatility

News and media outlets can pump out material to hype specific cryptocurrencies, resulting in heightened interest and short-term price hikes. For instance, during an interview, an “expert” may purport that a currency will soon be worth much more than it currently is. This is common, particularly for newly invented cryptocurrencies that try to bite into some of the market share of established coins. A clear case of media hype’s influence was seen when nearly all outlets announced the introduction of BITO Bitcoin Strategy ETF in October 2021. The announcement led to Bitcoin prices skyrocketing to an all-time high of $69,000+. However, after the hype dwindled, investors realized the exchange-traded fund was linked to the cryptocurrency through futures contracts traded on the commodities market. This quickly brought prices back down to around $50,000.

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Cryptocurrencies have become mainstream and continue to permeate various industries. Major eCommerce stores, gambling companies, financial institutions, and private sectors use popular cryptocurrencies. Despite the volatility of Bitcoin and Dogecoin, these coins have shown resilience and the potential to hold value over long periods. Price fluctuations may be dramatic, but they offer opportunities to make significant profits that may not be achievable with other digital assets. Whether Bitcoin will become a reliable means of exchange remains to be seen, but this might take years, given the preeminence of gold and fiat currency. Bitcoin has only been around since 2009 and requires time to achieve stability.

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