Why is cryptocurrency so volatile?
The cryptocurrency market has skyrocketed in popularity in recent years, but it is still much more volatile than most other markets, and that level of unpredictability can discourage investors from diving in. However, it’s important to understand where that volatility comes from and the fact that it is not a cause for fear in regard to the long-term future of crypto. Here’s a look at the primary reasons cryptocurrency is so volatile and what has to happen for that volatility to decrease.
It is difficult to assign value to crypto
Unlike most large companies or publicly traded entities, cryptocurrencies don’t sell products or services, generate revenue, or employ people. This makes it especially difficult to assign a clear-cut value to a particular cryptocurrency as compared to a well-known and easily tracked company like Amazon or Target. In the crypto world, the state of the market is most often determined purely by speculation and by what the media reports. This can be fairly misleading and not indicative of reality, but still has a significant impact on the public perception of the market.
Crypto regulation is limited
Unlike most other markets, there is very little formal regulation in cryptocurrency. Many have been waiting for regulation to pick up in order to make the market safer and easier to predict, but such a movement has yet to take shape. This limited regulation allows for a higher amount of market manipulation, which is a driving force in the heightened volatility and in the discouragement of investors who would prefer to know their investment was secure.
There is a lack of large investors
Most large investors and institutions heavily involved in other markets are still a bit wary of crypto. They believe in its long-term potential overall, but have yet to truly dive in. There has been a slight increase in institutional investment of late, but it is still highly lacking and is one of the main reasons crypto’s potential has not been fully tapped into. This fear stems primarily from stories about the market’s volatility and about the odds of crypto becoming more regulated.
Crypto’s short-term nature
Unlike most other markets, cryptocurrency can’t be bought via retirement accounts is not available to retail brokers and financial advisors, leaving out a huge share of investors that could play a role in steadying the market. The short-term nature of crypto creates an emotional reaction from investors who respond to any ups and downs with a higher likelihood of trading. This knee-jerk reaction is a top contributor to the overall volatility of crypto.
Will volatility ever die down?
While crypto is currently a highly volatile market, there is a bright and more predictable future ahead. More regulation, more investors, and more ways for business to start accepting crypto will all contribute to a decrease in volatility and to a healthier market in general. Younger investors more open to new technologies like blockchain have been carrying the industry thus far, but this trend will make way for larger, more experienced investors down the road.
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