In this article, we will provide you with information about the fluctuations in the cryptocurrency price and examine the importance of fluctuations in the price of digital currencies so that you have information in this field because you may want to buy different types of digital coins and this information can be useful for you.
The digital currency market has been welcomed by many investors and traders due to its large price growth in the past few years and has become one of the most popular financial markets with a large volume. In this way, you can also enter the cryptocurrency market and earn a lot of profit by buying and selling several types of digital currencies more efficiently. Of course, provided that you first learn the necessary training.
What does volatility mean in financial markets?
Volatility refers to the sudden rise or fall of prices in financial markets. When there is no decrease or increase in price, we will have no reason to trade and buy and sell a particular asset. This is especially important in large financial markets such as the stock market, forex, cryptocurrency, etc. Because the purpose of entering these markets and trading in them, apart from the discussion of storing value, is to gain profit from the increase in prices.
Therefore, the existence of fluctuations in the market is a natural and useful thing. But when the volatility exceeds the balance limit, it can increase the risk of transactions and make the transaction a challenge. The crypto or digital currency market experiences the most volatility among different financial markets. But in the following, we want to know the various reasons for the sudden changes in digital coins’ prices.
What do cryptocurrency price fluctuations emphasize?
Market volatility refers to the amount and repeatability rate of upward or downward price changes in an asset or market. Certainly, the more the price changes of a digital currency in a short period, the more market fluctuations will increase. In traditional financial markets, turbulence occurs in response to major events such as economic problems or wars between countries. Although the increase in the cryptocurrency market volatility has a higher investment risk, it can also provide attractive opportunities to market traders.
How does price fluctuations work?
Like other financial markets, the digital currency market has a lot of price fluctuations, and these ups and downs in prices provide traders with opportunities to earn a lot of profit. In this way, you can take advantage of these opportunities and make huge profits from the ups and downs in the prices of digital currencies. It is better to know that compared to traditional markets, digital currency markets are significantly more volatile. For example, in the first six months of 2022, when interest rates were rising globally and the war in Ukraine began, the S&P 500 index fell about 18%. At the same time, the total market capitalization of digital currencies decreased by nearly 60% and many coins decreased by more than 90% from their price ceiling.
Important events also affect the cryptocurrency price and other financial markets, but the cryptocurrency market reacts strongly compared to many events and news, such as the opinions of large investors or governments. This shows the relative lack of maturity of crypto markets and the fact that the underlying technology is in the early stages of development. The noteworthy point is that although the two concepts of risk and volatility are related to each other, in principle each of these concepts does not refer to the same thing.
The reasons behind high cryptocurrency price volatility
There is a general and simple answer to this question, and that is that this market is still in its infancy. We all know that it has been less than two decades since the advent of digital coins and the market is still in its infancy to follow the static curve. Every day, people are thinking about investing in this market. This is generally the case in any new market.
You may be wondering why the fluctuations in cryptocurrency prices are so high. There is a general and simple answer to this question, and that is that the digital currency market is still in its infancy. We all know that less than two decades have passed since the emergence of digital currencies and this market is still in its infancy to follow a static curve. Every day, people are thinking about investing in this market. This process is generally like this in any new market.
Investors and market traders try to earn a lot of money by investing in a new market and have easy income and also check whether they can influence the market by investing and selling quickly. As a market that has not yet found a set of logical uses, the cryptocurrency market is really in its initial stage. Usually, the result of this newness is a lot of fluctuations in this industry, which is mainly caused by intense tests that investors do to understand how the prices of digital currencies fluctuate.
Investors try to make more money and easy income by investing in a new market and also check if they can influence the market by investing and selling quickly?!
As we mentioned before, The crypto market is truly in its infancy as a market that has yet to find its own set of logical use cases. Naturally, the result of this newness is the high volatility in the industry, which is mainly due to the intense experiments that investors make to understand how the price of crypto fluctuates.
But the newness of the digital currency market is a general reason that includes some more detailed reasons. In the following, we will examine the more detailed reasons for this issue.
5 factors affecting crypto price fluctuation
There are various reasons for the sudden changes in the cryptocurrency price, all of which stem from the emerging nature of this market. But here are some of the most well-known reasons:
- The size of the crypto market compared to other markets
Due to its nascent nature, the digital currency market is much smaller than markets such as stocks or gold. The market value of crypto is less than two trillion dollars, while the market value of gold is more than 10 trillion dollars. When a market is smaller, smaller forces can shake the market. For example, if a group joins hands and sells a large volume of several hundred million dollars worth of gold at once, a small wave of volatility may occur in the gold market. But the same move, if done in the cryptocurrency market, will create a big wave of volatility. That is, the same movements as the cryptocurrency may occur in other markets, but because those markets are larger, seasonal fluctuations cannot affect their overall trend as much, but they do affect the crypto market!
- Laws of supply and demand
Most digital currencies, especially base currencies like Bitcoin and Ethereum, are completely digital and decentralized in nature; That is, they are not backed by any physical assets such as gold, commodities, or even fiat currencies. Therefore, the value and price of digital currencies completely depend on the supply and demand for these currencies. If one-day people realize that Bitcoin is no longer valuable and want to sell it en masse, the price of this currency will drop drastically. The reverse of this process also applies to creating price bubbles!
- The continuous emergence of new digital currencies
Although Bitcoin and Ethereum are among the most popular and valuable coins in the world, they face limitations such as limited scalability and high transaction costs. This issue causes new digital currencies to emerge every day and try to solve the problems of these super cryptocurrencies. Most of the new digital currencies are called Ethereum killers because they are launched to solve the problem of scalability and the high cost of Ethereum. Now, with the emergence of each new digital currency that offers more attractive features, the crypto community tries to start investing in it.
Speculations and bets that are made on the prediction of the rise or fall of cryptocurrency price are also considered to be another type of reason for the fluctuation of the price of digital currency. Most investors and traders are constantly trying to predict the rise or fall of digital currencies and make risky trades to influence prices. Such actions are another reason for the fluctuation of the price of digital currency.
- The influence of the media
Given that cryptocurrencies have created a small but fascinating market with a lot of speculation, the media has a large influence on its course. One of the factors that are used to perform technical analysis of the markets is the news that is released from the media about a particular asset. This is more pronounced in the case of digital currencies and can have a much higher impact on digital currencies than other markets.
Because with the publication of news in this field, most of the cryptocurrency investors act emotionally and go towards the group purchase or group sale of a cryptocurrency, and the reason for the fluctuation of the digital currency price can also be influenced by this factor to some extent.
- Amateur investors
To enter the digital currency market, no documents, specific amounts of capital, or special conditions are required. Anyone with a small amount of money and an internet risk can enter the digital currency market and start trading. This has caused amateurs and novices from all over the world to flock to this market. When the market is in a critical situation, institutional investors and professional traders can control their emotions and performance and wait for the market to stabilize; But amateur traders show hasty and wrong behavior and with this behavior, they can influence the market.
Many factors can be considered as the reason for the fluctuation of the cryptocurrency price. But the mentioned cases are among the most well-known. Although the impact of some of them may be small, in any case, the excessive volatility that occurs due to the nascent nature of the cryptocurrency market includes these factors. Of course, this list can be continued and more reasons can be mentioned for the extreme volatility of the digital currency market. But what is important is the ability to analyze and also control emotions while trading these currencies.
In this article, we provided you with information about the fluctuations in the price of digital currencies and examined the importance of fluctuations in the price of digital currencies so that you have information in this field. As we said, the digital currency market, like other financial markets, has a lot of price fluctuations, and these provide traders with opportunities to earn a lot of profit. In this way, you can take advantage of these opportunities and make use of some digital currency signals.
Frequently asked questions
- What does volatility in financial markets mean?
Volatility refers to the rise and fall of prices in the market. Balanced and general volatility is beneficial in the market. But if the fluctuations become severe, they will hurt the market trend.
- Why is cryptocurrency price so volatile?
The main reason for the instability of the digital currency market is the emerging and new nature of this market, which causes various factors to play a role in creating fluctuations in this market.
- What are the reasons for the fluctuation of the price of crypto?
Among the factors affecting the digital currency market can be the amount of supply and demand, the smaller size of the digital currency market compared to other financial markets, speculations, media, and the continuous emergence of new digital currencies for investment.