Why is Cryptocurrency so Volatile?
Bitcoin and other cryptocurrencies have incredible volatility. This means the price changes frequently and in large amounts, and it also means that the price is difficult to predict.
This volatility is caused by a number of factors, but the most important factors are large investment holders, tax incentives, global inflation, media coverage, and security.
The crypto market is full of new money. The entire asset class is less than 50 years old, and many of the largest investors had relatively low entry costs when crypto-assets were relatively cheap.
This is comparable to the futures market boom of the 1980s and the associated glossy Wall Street excess of that era. There are many large investors in cryptocurrency and it is often uncertain what they will do with their holdings. This creates volatility.
Relaxed tax regulations
Another factor is the unregulated tax environment of cryptocurrency. Decentralized financial assets like Bitcoin allow people to transfer money across borders without paying large fees.
Additionally, tax regulatory agencies like the IRS treat Bitcoin as a property investment and has yet to introduce stronger regulations. The low tax incentive of investment makes cryptocurrency even more volatile.
Cryptocurrency as a protection against inflation
One unorthodox aspect of cryptocurrency’s volatility is its use as a hedge against inflation in nations with devastating rates of high inflation.
Nations like Venezuela experience inflation that devalues the government’s fiat currency and cryptocurrency is much more attractive than more traditional investments that offset the effects of inflation.
The role of the media in cryptocurrency
A major aspect of cryptocurrency’s volatility is in the power of the media to influence public perception of the asset class. The inner workings of Bitcoin and other cryptocurrencies can be highly technical and strange to grasp for those without a personal interest in the technology.
As the technology behind Bitcoin is a mystery to many, news media plays a powerful role in forming a public perception of the value of cryptocurrency as an investment.
Security breaches and uninformed investments
Finally, the security of cryptocurrency investment can seriously affect the rapid price swings found in cryptocurrency. Cryptocurrency has long been a target for hackers and fraudsters, and this uncertainty can cause panic among investors.
Much like any other high volatility asset class, there are many retail investors looking to get-rich-quick that are burned by security breaches and fraudulent claims. As they say on Wall Street: Bulls make money, bears make money, and pigs get slaughtered.
What does volatility mean for investors?
Investors often look for high volatility in order to find good opportunities. If nothing is happening in the market, there are few opportunities to make a profit. Volatility is a sign that investors can buy and sell at prices that will change quickly and therefore find opportunities to make good money.
However, volatility can be a double-edged sword. Rapid price movement means the potential for both profits and losses are high. While one investor may make a great profit from a high price change, another investor can quickly take a large loss from the same price movement.
Investors in any market will be attracted to a volatility no matter their skill or experience level. However, most retail investors will end up losing their money on high volatility markets. Only a fraction of wise retail investors will be able to capitalize successfully on high volatility, and large institutional investors make most of the profits on the market.
How to capitalize on volatility
Capitalizing on high volatility means having access to two things: Good information and good technical analysis. Good information is often reserved for highly sophisticated investors with large amounts of capital, but this is not always the case in cryptocurrency.
Cryptocurrency news sites like e-cryptonews.com can give investors up-to-date info on cryptocurrency markets that help investors make money. Trading the news is a good way to predict volatility in the market, and our reporting can help you predict the value of your cryptocurrency investments.
Good technical analysis is another way to find good opportunities to enter and exit the market. Being able to read different types of price charts and understand the statistics behind technical indicators can give you an edge in finding trends in the market. A good trader can combine good information and good technical analysis in order to build a successful trading strategy.