There was sort of a cryptocurrency rush at the start of this year. Most investors flocked to the market, albeit cautiously. The market welcomed them by offering them good returns on investment. But around the end of April and early May, the market collapsed massively and the wealth of most investors was depleted. The magnitude of the crash can be understood by the fact that Bitcoin, the world’s largest cryptocurrency, hit a low of $ 31,000 (around Rs. 22.8 lakh), losing more than 50% from its historic high of $ 64,000 (approx Rs. 47.14 lakh) in mid-April. The market has since recovered, but volatility persists.
Why is cryptocurrency so volatile?
A simple answer might be – as it is still at a very nascent stage compared to other forms of investment and currency tools. The result of this novelty is high volatility in the industry. With the aim of building wealth quickly, investors try to experiment with their money and also understand how the prices of cryptocurrencies fluctuate or if they could influence its prices.
Take for example Bitcoin. Its price has moved almost wildly this year so far. At the start of this year it was trading below $ 30,000 (around Rs. 22.09 lakh) but suddenly started to peak in February and in April it almost doubled. Later that month, it crashed where it was in January. Its takeover began in June and by August it had crossed the $ 50,000 mark (around Rs. 33.83 lakh). But it crashed again below that threshold. The case is more or less similar for most other currencies.
Some other factors that play a role in deciding price movements are:
How many people use cryptocurrencies and for what purpose influences their price. If more people spend them on buying goods and services instead of just keeping them, the price will go up. With restaurant chains and online stores gradually warming to the idea, coins are likely to grow.
It refers to the finite mechanism of cryptocurrencies. The total number of Bitcoins that can be mined is predetermined in the protocol at 21 million. So, when more and more people join the industry, there is bound to be a shortage of Bitcoin and its price could skyrocket. Some coins also use the combustion mechanism, which destroys part of the available coins, to increase their value.
Sometimes accounts that hold large amounts of a coin start to sell, causing prices to drop. These accounts are called Whales because they have a large stake and can influence the market if some of them get along.