What is a cryptocurrency?
Cryptocurrency is a digital or virtual asset secured by cryptography.
The first cryptocurrency, Bitcoin, was issued in 2009 and famously became the first decentralized and trustless currency in the world.
What is decentralization?
Bitcoin, along with other cryptocurrencies, isn’t controlled by any single unity. It is controlled by all the users in the Bitcoin network and for the network to function properly, all users and developers need to be in agreement with one another.
What is trustlessness?
Before crypto assets were introduced money transactions occurred with the help of a third party (Ex. banks). However, nowadays transactions are made between two parties and this eliminates the need to rely on a third party.
What is volatility?
Cryptocurrencies are very famous for their high volatility rates.
In other words, this is the degree to which the price of the traded asset changes over time. There are various methods of measuring volatility, including standard deviation.
Volatility displays the amount of risk related to investments into certain assets.
Hence, it is greatly important for investors in order to manage risks.
Why is crypto so volatile?
Cryptocurrency is volatile for some main reasons:
1. Lack of Regulations
As we’ve discussed earlier, cryptocurrencies aren’t controlled or regulated by any government and bank like traditional currencies. This is one of their biggest selling points. However, it can also be a drawback.
As cryptocurrency is a new sphere in most countries it’s not regulated and in some countries is slightly regulated. This gives room for market manipulation that generates volatility in the market.
2. Small and Emerging Market
Something that isn’t considered when people discuss the question of crypto volatility is the fact that crypto is still a new and small market.
Cryptocurrencies have been around for only a decade and at its all-time high the total market volume was $800 billion. This compared to, for instance, the total value of the 60 major stock exchanges, $69 trillion, seems insignificant.
As a result, even small shifts, which wouldn’t affect fiat currencies, can largely influence the movements of the crypto market.
3. Crypto traders’ mentality
In the crypto space the crowd mentality has a large influence on the price of crypto-assets. Main users of crypto coins are millennials, who are known for chasing after trends.
Thus, if for example, spreads a rumor that Bitcoin’s price is going to double in a month, the number of people buying Bitcoin will greatly increase. The price will increase too but it won’t take long for it to drop. This is exactly what happened in 2017 when BTC reached almost $20,000 only to fall shortly after.
To have control on your crypto portfolio and minimize the negative effect of volatility, you can use cryptocurrency portfolio trackers.
How to overcome the volatility issue?
Many people claim that the problem can be solved with the help of stable coins, which are backed by something stable. However, stable coins do have problems of their own such as difficulty to use in international transactions and to divide into smaller pieces.
Nevertheless, stable coins can be beneficial for those, who want the benefits of decentralization but struggle with crypto’s volatility.
However, if we want to solve the entire issue, we need to look for a large scale solution.
Increasing institutional interest in crypto and its liquidity will significantly stabilize the market. Also as the market grows and more people start participating in crypto transactions, it will steady itself. This is because as the market gets bigger, manipulations become harder.