Although cryptocurrencies are in vogue in most countries, it is not uncommon to find that they are relatively volatile. Even though the use of virtual currencies has been wildly successful, the fact remains that users are faced with cryptocurrency volatility. As a result, it is pretty legitimate that some users are worried about the future of digital currencies. There are obvious reasons for this, and we’ll discuss that.
The workings of a decentralized system
When the stock market experiences a decline of about 7%, Wall Strict does not hesitate to suspend trading. This is because central banks are under pressure when the financial market collapses. Indeed, finance forces them to immediately implement stimulus plans. As a result, conventional currencies are not in danger of losing their value.
However, the process is quite different for cryptocurrencies. Unlike Fiat currencies, they work on a decentralized system. Take a company, for example, stock; stock price is defined by the business conditions of the company in question.
This simply means that the price of a stock is mainly determined by the health of a given sector. But since a stock represents a portion of the company, its variation remains limited. However, the price of cryptocurrencies is greatly influenced by the degree of speculation. It should be noted that the latter’s value is not conditional nor intrinsic.
The law of supply and demand
If there is a law to which cryptocurrencies are subject, it is obviously that of supply and demand. First, regarding crypto investments, the demand comprises the users. Thus, as much as crypto is solicited or accessible to investors as much its demand increases. Moreover, if the latter is available on several exchange platforms, this also increases demand.
In addition, the stiff competition seen between different cryptocurrencies also affects the demand. Among the cryptos driving demand in the investment market is Bitcoin, Ethereum, Ripple, and many others. Each of these digital currencies has unique features that attract investors.
With supply and demand, it’s all about balance. Thus, buyers and sellers directly influence the price of cryptocurrencies in the market. However, it is vital to conduct market research for a return on investment. This is done based on specific criteria grouped into two main categories.
Internal factors that influence the volatility of the cryptocurrency price
The factors that influence the volatility of digital currencies are multiple and of various kinds. These internal factors influence the domestic market only.
The capitalization of cryptocurrencies is based on the principle of cause and effect. Indeed, the higher the crypto price, the fewer traders invest, and vice versa. Take, for example, the case of the most widely used virtual currency: bitcoin. The value of the latter usually depends on the market situation. For this purpose, sellers and buyers use market tools to manage price fluctuations as best as possible.
- Transferring capital from one crypto to another
The price of bitcoin influences other cryptocurrencies, such as altcoins. Thus, the value of Fiat currencies of the latter drops or increases according to the fluctuations of bitcoin. So, using only market tools to analyze the situation of the crypto-currency you are interested in will not be enough anymore. In addition, you need to keep a close eye on the bitcoin price, as well as the situations of other traders.
External factors that affect the price of cryptocurrency
External causes of cryptocurrency volatility involve trends and events outside the cryptocurrency market.
- The economic crisis and the devaluation of Fiat currencies.
The demand for crypto money, especially bitcoin, increases when fiat currencies are devalued. The control of monetary and fiscal systems in times of local or global crisis also promotes the growth of bitcoin.
- The economic situation
The capitalization of virtual currencies is influenced by the opinion of political and economic authorities or the media. The economic situation of a country can have a direct impact on cryptocurrency volatility. Specific legislation also affects the demand for cryptocurrency in the long run. To understand the impact of cryptocurrency in today’s economy, all you have to do is follow the news closely.
Thus, the spread of global economic news will likely increase the price of cryptocurrencies, including bitcoin. Indeed, some news is false and is created to impact the price of cryptos. While a trader needs to be on the lookout for new trends and information, it is also recommended to do your own analysis.
Long-term cryptocurrency volatility
Some traders are hesitant to invest in volatile crypto. Nevertheless, virtual currencies have evolved, and many people now use Bitcoin. As proof, despite the reluctance of some, some countries are now opting for the official use of Bitcoin. The volatile cryptocurrency is an asset if the trader invests wisely. It allows investors to generate significant profits without using leverage.