Cryptocurrencies have enjoyed a dramatic rise in adoption and recognition across the globe. The first and largest cryptocurrency – Bitcoin – has its value constantly compared to gold. While many critics keep predicting the end of Bitcoin and other cryptocurrencies, the halcyon days are not over yet for crypto traders and enthusiasts. An important characteristic contributes to this: volatility.
Even though volatility has many enthusiasts wary of dabbling into the crypto world, seasoned investors often take advantage of this attribute to achieve more profits. Indeed, volatility is a key aspect of cryptocurrencies that must be understood. Thus, inviting these obvious questions: What is it? Should I be interested in it? Are there any factors that affect it? Keep on reading this comprehensive guide to discover the answers to these questions.
What Is Volatility?
Volatility measures the extent to which the price of an asset – in this case, cryptocurrency – moves up and down within a given period. Highly volatile assets are characterized by a wild swing in their price over a short period. On the other hand, low volatility involves a mild variation in price over a short period.
Cryptocurrencies are highly volatile assets. They experience wild variation in their prices over time. Volatility implies risk, but the high rewards associated with it can compensate for these risks. Volatility can also be viewed as a double-edged sword, capable of generating massive returns when there is a great swing in price and significant loss when the negative price movement is dramatic.
Factors Affecting Cryptocurrency Volatility
All cryptocurrencies, including teslacoin, are characterized by high volatility. There are various dynamics at play, which contribute to the constant price variation these cryptocurrencies experience. Some of these factors are discussed as follows
Supply and Demand
Just like most commodities, supply and demand affect the prices of cryptocurrencies. Cryptocurrency market value is basically affected by the number of coins that are in circulation and the amount that investors are willing to pay. Most cryptocurrency supplies are limited.
For instance, Bitcoin is limited to 21 million coins, by design. The closer the supply in circulation gets to the limit, the lower the rate of supply. In this case, the demand for the digital asset rises, which increases the price of cryptocurrency. The action users take can also influence the crypto’s volatility.
The cryptocurrency market is still in its infancy. After all, the first cryptocurrency was launched in 2009, just over a decade ago. Generally, a young market that is backed by a novel technology tends to be more volatile than an established traditional investment that has withstood the test of time.
It takes time for new technologies to be perfected. Despite the global adoption of cryptocurrencies, it is yet to reach its potential. This results in speculations, which can affect the value of the cryptocurrency.
As a new – and growing – technology, cryptocurrencies have generated lots of discussions on the internet. While cryptos have gained global prominence in the last decade, they are yet to be accepted like traditional assets. Media sentiments have proven to influence the value of cryptocurrencies.
When Tesla confirmed that it would not accept cryptocurrencies as a mode of payment, the value of bitcoin dipped. However, when the CEO of Tesla posted Doge on his Twitter page, the value of Dogecoin rose. Such influencing instances contribute to the volatility of cryptocurrencies.
Cryptocurrencies are seen by the government of many nations to be a threat to their FIAT currencies. While the use of these digital assets is legal – and they keep getting accepted as a means of payment – in some countries, they are banned in others. Again, this raises speculation about the future of cryptocurrencies, which contributes to their volatility.
Volatility is closely related to risk. If you are risk-tolerant, then dabbling into the crypto world is a wise decision. Higher volatility translates to a higher probability of higher returns due to greater price swings. This prospect of higher returns is appealing to seasoned investors.
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