Predicting the crypto market is challenging. Unlike the stock market, where technical analysis can offer some insights, the crypto market is more like the Wild West of trading.
While the stock market is generally stable, the crypto world is a rollercoaster ride. Even seasoned investors like Warren Buffett are hesitant to dive into it.
So, why all the volatility? Let’s break it down.
1. Small Market
Think of the stock market as a vast ocean, while the crypto market is more like a small pond. Trillions circulate in the stock market daily, but in crypto, it’s only millions.
And this small market is wide open globally, so even minor events can send prices spiraling.
2. No Central Authority
When it comes to crypto, you’re the captain of your own ship. No banks or governments calling the shots here. It’s all about trust between buyers and sellers.
In contrast, the stock market is influenced by company performance and regulated by authorities like the SEC.
3. No Intrinsic Value
Stock prices are based on a company’s performance, but cryptocurrencies don’t sell products, earn revenue, or employ people.
Companies work continuously to improve and offer dividends to attract investors. In contrast, only a small portion of a cryptocurrency’s value goes to miners, making it difficult to determine its true value.
Without fundamentals to rely on, market sentiment — often driven by media hype — dictates prices.
4. Fake NEWS
Crypto investors often rely on news media for market insights.
Unfortunately, fake news can create panic, spreading fear of missing out (FOMO) or fear, uncertainty, and doubt (FUD) among crypto holders.
These emotional reactions lead to erratic buying and selling, causing further fluctuations.
5. Fixed Supply
Scarcity can drive prices up, and top cryptocurrencies like Bitcoin have a fixed supply.
While this can boost future value, it can also create monopolies, making it harder to mine currencies.
With only a few people controlling the market, it’s not an ideal situation for traders.
6. Differences In Price
Top fiat currencies do not have a huge price difference, like Doller and Pound or Doller and Euro. Their prices don’t swing like a pendulum, making them super smooth for traders.
However, in the crypto realm, Bitcoin might be sky-high, while other cryptos are still in the hundred-dollar range. This price disparity makes it challenging for traders to find their footing in a still-developing market.
7. Manipulations
Market manipulation happens in the crypto world, too. With more central exchanges than decentralized ones and whales influencing prices, manipulation is a real concern.
New investors often struggle to understand what’s happening, making them easy targets for those looking to profit.
Running a centralized exchange can also be a tempting position for price manipulation, even in a regulated environment.
8. Lack of Security Measures
Some crypto exchanges are like leaky ships in stormy seas when it comes to security. Frequent hacking incidents make investors nervous.
That’s why the best way to store your crypto is to use cold wallets like Ledger Nano
However, not all exchanges offer robust security, and when they falter, the market suffers.
9. Non-Wide Spread Adoption
Crypto is still a relatively new concept. Many nations and banks are hesitant to endorse crypto transactions, leading to skepticism among potential investors.
Additionally, the association of cryptocurrencies with the dark web and illegal activities makes some people fearful of investing.
10. Short-Term Investors
Many crypto investors are focused on quick gains rather than long-term goals. This constant buying and selling creates market chaos, leading to unpredictable price swings.
Cryptocurrencies were intended to function as currencies, not market shares. While they can be good investments if held long-term, short-term trading adds to their volatility.
Final Thoughts…
These are some of the reasons why the crypto market is so volatile. Cryptocurrencies were designed to make our daily lives easier.
With the right knowledge and a long-term perspective, cryptocurrencies can be valuable investments.
10 Solid Reasons Why Cryptos Are So Volatile was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.