Why Are Cryptocurrencies Including Bitcoin So Volatile?

What makes you think twice before investing in crypto?

The inherent instability of cryptocurrencies is explored in greater depth in this primer on digital assets. Is there a reason for the wild swings in the cryptocurrency market? Is it a good time to buy cryptocurrency?

And why do many related technologies keep cropping up around crypto while economists and business experts like Warren Buffet and Paul Krugman call crypto a “mirage” and predict its demise? The experts weigh in on whether the inherent volatility of cryptocurrencies and the nature of the market are to blame for the market’s erratic behavior.

The Cryptocrash Of 2022

In July 2021, Bitcoin’s price fell below $30,000 (Dh110,193) for an extended period. Many experts have begun referring to this as a “crypto winter,” citing the similar declines of cryptocurrencies like Ether and BNB.

Because of the collapse of the Terra stablecoin, the cryptocurrency market as a whole became unstable, resulting in a loss of almost $200 billion. In contrast to traditional cryptocurrencies, the value of stablecoins is anchored to that of a certain fiat or commodity. Luna Terra coins are now nearly worthless with a roughly 80% drop in value.

Why Is The Crypto Market So Volatile?

Everything can be reduced to the logic of supply and demand-based markets. The difficulty with cryptocurrencies is that their true worth is still elusive to fully quantify.

How Is The Stock Market Similar To The Currency Market?

It’s important to note that the stock market trades stocks or shares of a certain corporation, while cryptocurrency exchanges trade decentralized digital tokens. Contrarily, cryptocurrency exchanges deal exclusively in digital currencies.

Even if a stockholder only owns a fraction of a share, that share still represents a stake in the company. The cash flow statement and the income statement are two methods that can be used to calculate a company’s true worth. The value of cryptocurrencies varies depending on who you ask, and it’s not always easy to pin down where that value comes from.

Finally, the volume of capital invested in the stock market is significantly larger than that in cryptocurrency. As of 2022, the New York Stock Exchange (NYSE) had a market capitalization of approximately $27.2 trillion, making it the largest stock exchange in the world. The total value of the cryptocurrency market is less than two trillion US dollars at the moment.

Is Bitcoin Too Variable To Be Used As A Currency?

The existing cryptocurrencies’ volatility is a major drawback for widespread adoption. When market volatility is low, it indicates that investors can expect steady conditions and consistent returns from the market. Also, the time needed to receive monetary compensation will increase.

The risk is increased, but the potential profit is higher if you can take advantage of it. Since the cryptocurrency market is still young, volatility is to be expected, and huge cryptocurrency holders (known as “big fish” or “whale traders”) pose a security risk. Since only a handful of very large investors control most of the cryptocurrency in circulation, their trading activities can weaken the market.

Would It Be A Good Idea To Invest In Cryptocurrencies Now?

The investment maxim “buy the dip” might be useful when dealing with cryptocurrency, as it can be with other markets. Given the crypto market volatility, however, I think even huge investors should only put a modest portion of their capital into it.

Investing in cryptocurrency is not good if the funds are intended for something else, like a child’s college fund. An investing portfolio should only consist of a modest amount of volatile assets.

When asked why they think cryptocurrency will fail, economists and corporate executives typically give the same answer: because of regulatory uncertainty. Many conventional economists and financiers see cryptocurrencies as scams or high-risk ventures.

Warren Buffet is well-known for his commitment to firms that create value for their shareholders and the greater good of society; hence, Buffet would never consider investing in a company or venture that does not achieve so.

One of the biggest issues with cryptocurrencies is that it can be difficult to determine how much value they actually create.

Since blockchain offers several advantages like security, decentralization, lower costs, and speed, it is likely that the financial sector and governments will eventually realize that they rely on blockchain technology.

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