Unless you’ve been living under a rock, chances are you’ve heard of cryptocurrencies. For the uninitiated, it is a type of currency that doesn’t require traditional tender like paper bills, yet still allows one to make purchases of goods and services.
With this in mind, one may wonder why not many people have started adopting such a currency for their day-to-day activities. Why haven’t more vendors accepting this form of currency? And yes, why aren’t more people investing in these types of currencies?
The simple reason could be its volatility. In plain English, “volatility” is when a medium, such as cryptocurrency, can easily gain or lose its value just like that. One cannot tell if the cryptocurrency they’re holding on to could be worthless within the next five seconds. While this imagery may be a bit exaggerated, it helps drive home the point that cryptocurrency prices tend to be relatively unstable.
Take heart, though, as this volatility is not necessarily a bad thing. Keep in mind that while its value may drop, it can likewise do the opposite—your cryptocurrency could just make you a millionaire. Holding on to a digital currency and monitoring its movement could just be a godsend. That currency you possess could just be your ticket to the big time.
Why Cryptocurrency Prices Change
So, we know that the cryptocurrency market can be volatile and fluctuate as much as a person’s blood pressure. But why is this so, you ask? Here are a few key reasons:
- There is no intrinsic value.
What this essentially means is that it has no such thing as a company’s net profit, a product, or anything of value attached to it. Hence, its value can easily be swayed by forces that influence whether it becomes a gold mine or as worthless as an empty tin can.
- There is no one body regulating how people trade it and how much it is worth.
Sure, a lot of governments around the world are trying to clamp down on it. But in the end, no one is actually watching what is going on. Although many countries are increasing their adoption and regulation of digital currencies, the industry and its regulatory standards are still very much in the inception stage.
- Not many people are investing in cryptocurrency just yet.
Sure, a number of hedge funds, venture capitalists, and the like are using it. But no large financial institution is really putting their money on it just yet. In short, they’re all in a wait-and-see attitude on what will happen to this new form of currency. Until then, its value will likewise be as volatile as those folks who can’t make up their minds about it.
- In line with this, the order books for cryptocurrencies haven’t really filled up.
Think about it this way: if there are only 100 tokens in circulation for a cryptocurrency, buying or selling 10 tokens will have a significant impact on the market. However, if there are millions of tokens in circulation, that same 10-token transaction will have less of a market effect. For the most part, cryptocurrencies aren’t widely-traded yet, making them less liquid and more susceptible to market fluctuations.
- As with anything unstable or volatile, cryptocurrencies do not yet have any long-term value.
While many investors wait for this to happen, the same number of players are left out. It takes a truly brave soul to invest in a currency that could easily lose its value in the blink of an eye. That being the case, there’s a reason the saying goes “Fortune favors the bold.”
- Investor confidence is still growing.
It seems that while not many traditional investors have put their confidence and money into crypto, many risk-takers like millennials have taken the plunge. Unfortunately, many aren’t exactly taking calculated risks. In fact, some people have simply gotten on the bandwagon because, well, everyone else that wants to be “in” is doing so. This obviously won’t fly in the financial investment community that goes by the so-called calculated risk.
- As mentioned above, the market is still evolving.
There are still no set standards, no value, and no long-term gains to speak of. Yes, there are success stories. But these are short-lived and tend to happen few and far between. No one really knows what tomorrow, let alone the next five minutes will be for cryptocurrency. Hence, not many people are willing to take the risk with these potentially volatile currencies.
- Cryptocurrencies are at the mercy of consumer sentiment.
Arguably the most compelling reason why cryptocurrency values tend to fluctuate is that they are driven by a market that itself is swayed by sentiment and perception. As harsh as it is sounds, the reality is stocks, currency, and other securities have no feelings. We figure that this is why it’s called cold, hard cash. But seriously, you need to think things thru, take calculated risks, and not let yourself fall for buying or selling frenzies. Doing so can easily cause an unstable situation.
And this is what the cryptocurrency market is. Although there are no set values, no regulators, and in the end, no “physical” gains, it’s important to understand that the market does attach intrinsic value to digital currencies, though that value is heavily-susceptible to market perception.
Crypto traders need to base decisions on real research, not on hype or a collective/hive mindset. You’re responsible for doing your due diligence if you want to improve your chances of success. Remember that cryptocurrencies are still generally for those with higher risk appetites, but with more risk comes the potential for more gains.
The choice is yours!
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