What Causes Cryptocurrency To Fluctuate?

Cryptocurrencies are known for their extreme volatility, but this also is why they are able to produce such wealth. More than 1,000% rallies in crypto are common, while a stock share might never see such gains in its entire existence.

This volatility and the wild price fluctuations are part of what attracts new market participants again and again with each major bubble, and with each new wave the market and market cap of cryptocurrencies gets much larger.

But have you ever considered what actually causes cryptocurrency assets to fluctuate in price so wildly in the first place? And is it possible at all to predict these fluctuations with enough degree of accuracy to improve the rate of profitability? Let’s find out.

What Is Cryptocurrency? From Altcoins To Bitcoin

A cryptocurrency is an emerging technology built using cryptographic computer code and involves storing assets on the blockchain. The computer code also powers a cryptographic protocol that protects the network from hacks or other security issues.

Cryptocurrencies first emerged when Bitcoin was born at the end of The Great Recession. The coin’s creator, Satoshi Nakamoto, also developed the first working instance of blockchain technology with the introduction of Bitcoin. Since then, thousands of cryptocurrencies have been created each with a unique use case or goal.

Ethereum, for example, isn’t just a currency like Bitcoin, it also is a supercomputer that runs decentralized applications through a technology called smart contracts. Smart contracts are executable code that can be designed to run all kinds of technologies.

Smart contracts have allowed the creation of new sub-sectors of the cryptocurrency industry, such as NFTs and DeFi. NFTs are non-fungible tokens that represent digital ownership over unique digital items. DeFi, or decentralized finance is another disruptive area of the market that offers permissionless lending and borrowing.

Why Cryptocurrencies Are Still Speculative Assets

If all of this sounds somewhat confusing from a technical standpoint, don’t worry, you’re not alone. Cryptocurrencies are a new technology that not everyone understands, and was a set up to represent our point: Crypto is a speculative asset class.

People don’t yet fully understand what the technology does or what benefits the assets provide, let alone know what the assets should be valued at. Bitcoin is also yet another ideal and polarizing example. Pundits claim it will go to zero, yet those in support of the cryptocurrency believe it will someday be worth millions per coin.

Because no one knows what these assets will or should be worth, the market can only speculate on what these prices might be some day, and all price action is the result of natural price discovery.

And because cryptocurrencies are speculative, they are highly subject to wild price swings due to extreme shifts in sentiment. And with crypto, an interesting thing always happens – people always want to buy the coin when it is at all-time highs, but ignore buying the asset while prices are low.

Why Crypto Market Sentiment Shifts To Such Extremes

At the start of 2020 everyone expected Bitcoin to go to new highs. It was back at $10,000 for what felt like the hundredth time, and finally had momentum behind it. Then COVID hit and Bitcoin plummeted back to $3,000 on Black Thursday.

Investors were afraid to touch it in fear of it potentially crashing to zero if the economy kept falling. But it didn’t, and the opposite happened and the perfect storm in Bitcoin happened next. Trillions of dollars in stimulus money was printed, all while there was only 21 million BTC.

Talk of inflation and low interest rates caused risk appetite to shift, and investors loaded up on meme stocks and crypto. Bitcoin exploded from $3,000 to $60,000. At the high, everyone expected Bitcoin to reach $100,000 or more. Yet it crashed severely to $30,000. Now, even though people just months ago were expecting $100,000, they’re now expecting a revisit back to $10,000 or worse.

The flip flopping of positions is a poor investment strategy, so investors are often advised to HODL, but that can lead to sitting in losses for years at a time. This is why many choose to trade Ethereum and other cryptocurrencies instead.

Why Trade Cryptocurrencies Instead

Markets are cyclical and rather than holding through a bear market, those who have been around the crypto market for years eventually turn to trading instead. It can take even just one peak and trough to realize the potential gains left on the table by not trading instead.

For example, any investor who bought Bitcoin in 2020 did well all the way into 2021, but then lost half their gains during the selloff. But those that traded, could have secured profits from the rally upward, and even shorted Bitcoin before the crash and profited on the way down.

Trading is better suited for speculative assets like cryptocurrencies, and can be an ideal tool for stock, forex, and commodity inventors also. Trading these assets via CFDs such as the derivatives provided by PrimeXBT allow the ultimate flexibility when it comes to position management.

This is especially helpful with managing the highly volatile crypto market, which requires technical analysis tools, stop loss management, and much more to survive. Over time, the volatility in each cryptocurrency will reduce as adoption takes place and more liquidity comes into these assets.

Summary

The low liquidity compared to the likes of forex, stocks, or gold are part of what makes crypto so wild also, but can’t be as easily managed. It is this low liquidity and adoption situation that makes crypto more speculative of an asset class than those involved would like to believe. The solution to speculation is to trade rather than HODL, and only time in the market will teach that.

Adoption is here, but it will move slowly and price discovery will be volatile and even painful along the way. Bitcoin and other assets like Ethereum will boom and bust several more times over, with bull and bear phases in between. Knowing that in advance, would you rather HODL and hope for the best, or is it time to consider trading crypto instead?