5 Reasons Why the Cryptocurrency Market is so Volatile

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The cryptocurrency market has always been extremely volatile, including  last year, which has been an oustanding year for the cryptocurrency market. Many people have started to mine cryptocuurencies, seeing the potential of the technology. On the other hand, stock exchange traders are commonly replaced by machines since they are more performant with algorithms. However, the volatility of the stock exchange is nothing compared to the cryptocurrency market. A one month change in cryptocurrency price can cover four years of volatility in the stock exchange. Here are 5 reasons why it the most volatile of any liquid assets on the market.

Regulatory Actions 

Cryptocurrencies have the possibility to change many industries’ functionment around the world. Many governments want to regulate the cryptocurrency market in order to make it safer and allow institutional investors to put money in. However, regulations are still in their early days, which makes the market easy to manipulate. This brings more volatility to the market and less institutionnal investors because they have no insurance that their large sums  are secured and safe from malicious individuals.

Hard to Value

Contrarily to the companies listed on the stock exchange, usually, cryptocurrency companies don’t have a product to sell and don’t have a lot of employees. Also, they generally don’t earn revenue and they don’t return dividends as a lot of stock exchange companies do. There is no intrinsic value to these cryptocurrency companies because there are no fundamentals on which consumers can rely to make decisisons regarding the crypto market. The only source of informations are medias, so often your decisions will be influenced by them. A decision to invest in a token will also depend on your research and on your feeling about the market so it is very subjective.

Not Enough Institutionnal investment

A lot of high net-worth hedge funds or venture capital companies invest in the cryptocurrency market and are paying attention closely to what’s happening in the market. However, most of the big institutionnal investments are not made in the cryptocurrency market. Many financial institutions believe that the blockchain technology has potential on the long-run, but have not committed important sums of money to the market.  Institutionnal investments can come from mutual fund buying on behalf of their investors for the long term or from large trading desks.

“Pump” Actions

Since the market is still at his early stages with a market cap that hasn’t hit the 1 trillion mark yet, large investors can have a huge impact on the market. When a group of large investors decided to move the market upwards or downwards, it creates a lot of volatility since the money they move is an important percentage of the market.

Millennials and Cryptocurrencies

The millennial generation is the one that is the most excited about cryptucurrencies. The younger generation has a tendency to distrust governments and is open-minded to new technologies like blockchain that can disrupt the way society functions. Most of the time, the millenials don’t think about investing for the long term, since they only have student jobs that don’t pay much. A combination of these factors will influence younger people to go for risky investments without doing their research, thinking it will be easy to make a lot of money. Some of them will use their credit cards to buy cryptocurrencies thinking it is safe but, as soon as the market drops a little bit, they will sell what they invested for a lower price than they bought it because it is money they can’t afford to lose. Then, when the market starts growing again, they buy crypto again with money they don’t have and the cycle repeats itself. By combining reactionary behaviour with swings caused by large investors, it makes the cryptocurrency  market even more volatile.

Will Volatility Decrease?

Very soon, there will be more governmental legislation in the market, which will bring an important number of corporate and institutionnal investors. The more a market has a large market cap, the less volatile it is. This is explained by the fact that the bigger a market is, the less it is affected by large transaction percentage wise. As the market continues to grow and the technology becomes more adopted, the volatility of the market should decrease gradually.

 

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