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Crypto Volatility

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Crypto currency markets are volatile. Since their beginnings, the value of cryptocurrencies
such as Ethereum and Bitcoin have seen huge drops and spikes – sometimes in a matter of
minutes. Why do we see swings in Bitcoin, eth, and other cryptocurrencies?

Crypto Volatility

Why is this particular market so volatile?

What is Volatility?

In simple terms, volatility refers to the extent to which the price of an asset varies with time.
An investment is volatile if its prices move up or down aggressively on daily basis, as
is the case in the crypto currency markets.

Risk-averse investors tend to avoid high- volatility investments. On the other hand, risk-takers welcome volatility in the market. Those who participate in the cryptocurrency market are essentially risk-takers.

Many consider Bitcoin volatility to be a good thing. A feature, not a bug. The ability to potentially make lots of money is arguably the biggest draw for many cryptocurrency investors. The volatility of the crypto market allows for the potential of higher returns and presents a great opportunity for investors and traders to exploit it to make money in any direction of the
market.

Cryptocurrency Volatility

Is Crypto Volatility a Feature?

Bitcoin and crypto in general is volatile by design. They trade at a more unpredictable rate as compared to bonds and stocks. Following are the key reasons why Bitcoin and other cryptocurrencies are so volatile:

Demand and Supply

Demand and supply significantly affect the value of this virtual asset. The collection of
Bitcoin plays a key role in rapid price movements. Because of this, it is possible for one wealthy individual or entity to drastically affect the price by selling or buying this virtual
currency.

Cost of Production

The mining process requires computing power. Miners invest in expensive technology and
consume costly electricity to mine Bitcoin or other cryptocurrency. The cost of mining rises as better appliances are needed to mine, hence affecting the crypto’s volatility.

Crypto is New

People have used Bitcoin for a relatively short period as opposed to fiat and gold currencies that are stable commodities. When compared to these, the digital asset is still in its finding
phase. Because of this, its price will continue to fluctuate.

Competition

There are a wide variety of cryptocurrencies in the market, with new tokens and projects ( such as the Polygon Network ) launching on daily basis. When competition becomes fierce, it results in a decrease in prices by driving down the value of all cryptocurrencies, including eth and Bitcoin.

Crypto Whales…

Crypto whales are large cryptocurrency holders. They typically have large amounts of money and crypto at stake and can move the market drastically by selling or buying huge amounts of cryptocurrencies. For instance, if one person owns the world’s fourth-largest Bitcoin wallet and they decide they want to cash out some of their Bitcoin, this has the potential to cause the Bitcoin price to fluctuate a lot in the short term.

Outlook: Continued Crypto Volatility

Overall, while the cryptocurrency market provides an attractive alternative financial network it is highly volatile and it is a double-edge sword. It can potentially generate attractive returns but you also face an increased risk of losing a lot of capital. All the above-listed factors contribute to the cryptocurrency volatility in one way or another.

Understanding how these factors cause volatility can help you succeed as a cryptocurrency trader.