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Why Are Cryptocurrency Prices so Volatile?

With Bitcoin volatility being one of the highest of any mainstream asset classes, cryptocurrencies are the natural manifestation of a decentralized, unregulated and free market. So let’s get right into why that is.

1) Speculative asset

Speculative assets are a dirty word in finance – it usually represents scams, non performing assets or economic bubbles that are far above its intrinsic value. However, one can’t deny the speculative nature of cryptocurrencies today, since few of them even have a working product. The definition of a speculative asset means that its price is only dependent on what someone else is willing to pay for it. If people decide Bitcoin is going to do well in the future, they buy Bitcoin, increasing its price. The same is true in reverse. Cryptocurrencies are largely speculative, with future returns being more of a promise than a guarantee.

It’s also important to note that very few cryptocurrencies can be classified as ‘securities’, meaning they would be akin to ‘cash generating assets’. Kucoin Shares, NEO and other token distribution coins come to mind. However, even these are speculative since the value of the tokens generated are also speculative.

2) The value of a speculative asset can never go to zero

The nature of a speculative asset means that it can undergo wild fluctuations in price, going to down to almost zero if conditions are dire. However, it’ll never truly go to ZERO, and might hover right above it. This is simply because anyone can buy the entire supply at zero and sell it to someone else for a fraction of an amount more, and so on. Even BitConnect, a well known ponzi scheme masquerading as a cryptocurrency investment package, didn’t become completely worthless (though it did fall by 97%).

3) There are no fundamentals to back up Bitcoin price

Shares in a company like Google or Apple are backed up by their financial performance. Profits, or the promise of future profits due to good financial health can be ascertained from their annual reports or SEC filings. Bitcoin, and most cryptocurrencies, isn’t a company. They operate on their own economic model that isn’t backed by finance fundamentals, but rather adoption of the tech. The adoption of the technology is subjective to every investor, and therefore the investing paradigm moves on from things like debt and PE ratios to things like Stoch RSI analysis.

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Our article on 10 Things You Should Know About Buying Cryptocurrencies is a guide on how to research every coin for yourself. Check it out.

Simply put, because there’s no numbers to look at, Bitcoin’s price is simply what people are willing to pay for it. If AAPL shares suddenly went to $1000 but finance analysts measured it to be worth only $200, they wouldn’t buy the stock. With Bitcoin, you can’t do that, and it becomes a free for all.

4) Unregulated market leads to price manipulation

Despite increasing scrutiny from large governments, cryptocurrencies are still largely unregulated. It’s also a global market, so regulation in one country doesn’t affect the others. Institutional investors, whales and big players are able to get free reign on a global, unregulated and instantaneously responsive market, which leads to great swings in price. Schemes such as pump and dumps, which are illegal in most civilized stock markets, happen daily in cryptocurrencies. Multiply this with the speculative nature of cryptocurrencies, and you have one of the big factors for these wild swings in price that you see.

cryptocurrency pump and dump explanation
A classic crypto pump and dump.

5) Constant news of regulation

News of regulation, or “banning” Bitcoin creates cloudy days in crypto land. Every month or so, there’s a new media blitz of (insert large country) banning cryptocurrencies. In September it was China, in December it was South Korea, in January it was the US and last month it was India. In actuality, regulation of a new technology such as cryptocurrency takes time. Most of the news regarding regulation is misrepresented or is usually called back, so do your own research and get your information straight from the source.

bitcoin illegal in india
After the Union Budget this year, Indian news media started rallying on the “Bitcoin has been banned” bandwagon. Except it hasn’t.

6) New technology still hasn’t found its footing

Any new technology takes a while before finding its place in the world. If you follow cryptocurrency news, you are probably an optimist in the role of blockchain technology in the future. It could also be a gigantic failure, or as naysayers call it, a “massive ponzi scheme.” We are still in early years of this tech – smart contracts weren’t even invented till 3 years ago. Cryptocurrency and blockchain tech is today where the internet was in 1991. Early adopters have to fight many technological and regulatory hurdles, and the vast variance in crypto prices reflects that uncertainty. You can fully expect the swings in price to contain themselves once the market reaches sufficient maturity.

7) Brownian markets

At the end of the day, no one can predict markets. Some times they’re indeed, completely random. The brownian motion of markets is like the icing on an already volatile cake. Some times, the market behaves irrationally for no real reason. While this won’t create noticeable spikes like a pump and dump would, it’s more of a prevalent truth than an underlying afterthought in this market. Amplifying that with cryptocurrency’s speculative nature, its manipulated markets and new technology gives us a perfect mix of opportunity and volatility.

Written by Upamanyu Acharya

I founded Fynestuff. I play games, write tech articles and look towards putting Buzzfeed out of business someday. Let's talk about crypto: [email protected]

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