Published on August 6th, 2019 | by Sunit Nandi

Explaining the volatility of cryptocurrency

The only thing constant about the valuations of Bitcoin, Ethereum and other cryptocurrencies are their volatility. Cryptocurrencies are a form of digital money which have not been issued by banks or governments. This lack of regulation and control have made them especially popular with individuals who value their privacy.

Created by the enigmatic Satoshi Nakamoto, Bitcoin was introduced to the world back in 2008 when the domain bitcoin.org was first registered. As explained by Nakamoto, Bitcoin was intentionally structured to be an inflation-proof store of value due to the limited supply on the market at any given time.

Alongside this, the unregulated nature of cryptocurrency like Bitcoin and Ethereum it popular with those involved in illicit or legally questionable activities. With cryptocurrency exploding onto the mainstream in 2017, investors all over the world were eager to snap up cryptocurrencies and all things Bitcoin.

Things eventually calmed down in the 3rd quarter of 2018 as valuations began falling, a situation further compounded by China’s banning of Bitcoin trading. In turn, investors began flooding the market with Bitcoin as speculators began claiming that the end was nigh.

However, that would turn out to be just hearsay as Bitcoin and other cryptocurrencies began to see an increase in prices during the 2nd quarter of 2019. With prices fluctuating wildly on a daily basis, the volatility of the crypto market has both made and broke millionaires overnight.

With what little knowledge we have, here we discuss just some of the reasons behind Bitcoin’s insane volatility.

1. Most governments don’t know how to regulate Bitcoin

Ironically, Bitcoin’s strongest characteristic is also at the same time it’s Achilles’ heel. Being unregulated and uncontrolled by any government entity has allowed users to enjoy a large degree of anonymity when conducting transactions. This feature was what first drew most early adopters of Bitcoin.

However, the pseudo-anonymity offered by Bitcoins and other cryptocurrencies has also caused significant consternation for many governments. As cryptocurrencies are outside the control of any government entity, large sums of cash can be easily transferred into or out of any country with no legal ramifications.

From allegations of tax evasion and fraud to criminal charges like money laundering, governments all over the world have been cracking down on the crypto industry and its users. As a result, this has resulted in increased volatility in the industry with speculators citing fears of a government shutdown.

For example, back in 2017 when China began cracking down on cryptocurrency trading, Bitcoin valuations plummeted from $9,000 to just $6,000 in a matter of hours. The highly fluid nature of cryptocurrency trading and the power of social media means that prices can change drastically with little-to-no warning in the aftermath of a panic or a sudden rush. Thus, we can see why crypto prices are as volatile as they are.

2. Scandals worry investors

Cryptocurrencies such as Bitcoin are a relatively new item for many investors who often lack in-depth knowledge related to Bitcoin. As a result, being treated as just another commodity albeit one with no actual backing can skew the perception of many investors. Unlike gold or shares, Bitcoin is not controlled by any single organization or government.

This often means that Bitcoin valuations can be highly susceptible to a variety of external factors. For example, in the aftermath of the Mt. Gox scandal, panicked investors dumped all of their holdings of Bitcoin and flooded the market.

Being the largest Bitcoin exchange of its time, Mt. Gox handled a huge number of Bitcoin transactions, but security was often lax. This resulted in a number of high-profile hacks that resulted in billions of dollars’ worth of Bitcoin becoming lost. These heists did little to boost investor confidence and when Mt. Gox declared bankruptcy, the market erupted into chaos.

Consequently, Bitcoin’s value relative to fiat currencies fell drastically and millions were lost in just a few hours.

Be aware of the security clauses of the crypto exchange system you use. For example, according to several eToro reviews, this company operates with KYC policy, something that assures that the user will not be affected by any eventual breach or hacking scandal. This is something you should pay attention to.

3. Holders of large quantities of Bitcoin

It’s no secret that a huge amount of the market’s Bitcoins is in the hands of several massive investors. As a result, any sudden changes in their holdings of Bitcoin can severely affect the market. With some investors holding upwards of USD 10 million worth of Bitcoins, many are questioning how they would be able to liquidate their holdings without destroying the market.

This coupled with the already volatile nature of Bitcoins further compounds an already complicated situation. Until the market is able to achieve critical mass, we can only wonder as to how they would go about transferring their cryptocurrency holdings into fiat currency.

The development of Bitcoin has opened up a whole new world for investors all over the world. For better or worse, the market can be expected to remain volatile until the near future. Investors will need to diversify their holdings or utilize financial instruments as a means of managing their risk exposure.

Tags: cryptocurrency, explaining, volatility

About the Author

Sunit Nandi I'm the leader of Techno FAQ. Also an engineering college student with immense interest in science and technology. Other interests include literature, coin collecting, gardening and photography. Always wish to live life like there's no tomorrow.