{"id":28,"date":"2021-08-05T23:33:58","date_gmt":"2021-08-06T06:33:58","guid":{"rendered":"https:\/\/theplandanhollings.com\/?p=28"},"modified":"2021-10-07T14:30:14","modified_gmt":"2021-10-07T21:30:14","slug":"why-does-cryptocurrency-fluctuate-so-much","status":"publish","type":"post","link":"https:\/\/theplandanhollings.com\/cryptocurrency\/why-does-cryptocurrency-fluctuate-so-much\/","title":{"rendered":"Why Does Cryptocurrency Fluctuate So Much? Understanding Market Volatility"},"content":{"rendered":"\n

When Katy Perry released Hot N Cold in 2008, she probably had no idea how prescient the words \u2018You’re hot then you’re cold\/You’re yes then you’re no\u2019 would be about the crypto market today \u2014 but here we are.<\/p>\n\n\n\n

Massive fluctuations in the price of Bitcoin and other assorted cryptocurrencies have been dominating the news lately. For the average investor, such uncertainty about price movements is an intolerable risk. But they could be missing out on thousands in unrealized passive gains from the market.<\/p>\n\n\n\n

Fortunately, by the end of this 6-minute explainer, you\u2019ll have learned exactly why the price of crypto fluctuates so much, why you shouldn\u2019t fear it, and how to capitalize on it to make money.<\/p>\n\n\n\n

What is cryptocurrency and market volatility?<\/strong><\/h2>\n\n\n\n

Cryptocurrencies are digital currencies whose transactions are tracked in a distributed public ledger called the blockchain. Bitcoin, Ether, and Litecoin are all examples of popular cryptocurrencies. Like Forex or the stock market, you can trade digital currency in markets to make a profit. Unlike Forex or the overall stock market, the crypto market is incredibly volatile.<\/p>\n\n\n\n

In a volatile market, investors see large prices swings and high trading volume. A surplus of trade orders in one direction \u2014 all sells and no buys, for example \u2014 can result in these imbalances. Various things can cause markets to move, including economic and company news, opinions from well-regarded analysts, IPOs\/ICOs, or unforeseen earnings reports.<\/p>\n\n\n\n

Five Factors Behind Cryptocurrency Volatility<\/strong><\/h2>\n\n\n\n

Numerous factors can influence the movement of a cryptocurrency\u2019s value. Explaining the dynamics of every cryptocurrency on the market is a Herculean feat, so for most of this explainer, I\u2019ll be discussing the price of Bitcoin.<\/p>\n\n\n\n

The supply of the currency<\/strong><\/h3>\n\n\n\n

Let\u2019s take a trip back to ECON 101 \u2014 Bitcoin\u2019s price, first and foremost, is determined by supply and demand. We\u2019re going to focus on the first part of that equation for now.<\/p>\n\n\n\n

Under the Bitcoin protocol, new Bitcoins must be created at a set rate (Bitcoins will stop being made after 21 million coins). The introduction of new Bitcoins to the market happens when miners process transaction blocks, which will slow down as time goes on. As a result, demand can grow faster than the supply, thus increasing the price of Bitcoin. Many cryptocurrencies have similar protocols in place, each designed to be an artificial inflation mechanism.<\/p>\n\n\n\n

A cryptocurrency’s supply is also determined by its availability on cryptocurrency exchanges. (This doesn\u2019t apply to Bitcoin\u2019s price). Suppose very few exchanges allow a cryptocurrency to be traded on their platform. In that case, it\u2019ll be challenging for the average crypto investor to buy any. Conversely, news that several exchanges recently added a coin could significantly boost its supply and alter its value.  <\/p>\n\n\n\n

The demand for the currency<\/strong><\/h3>\n\n\n\n

On a psychological level, nothing fluctuates the price of Bitcoin and other cryptos like news and government announcements \u2014 and maybe Elon Musk\u2019s Twitter account. But from an economic standpoint, there are solid reasons that the demand for Bitcoin is so high.<\/p>\n\n\n\n

Firstly, its value has skyrocketed, and people are interested in the currency as an investment vehicle. Beyond that, many are losing faith in their nation\u2019s fiat currency. Especially after massive money printing from their governments, citizens and consumers are searching for alternatives to store their money. The decentralized nature of Bitcoin and cryptocurrency overall makes it an attractive option, increasing demand and driving up prices.<\/p>\n\n\n\n

Media coverage and perceived demand<\/strong><\/h3>\n\n\n\n

Several psychological factors go into the demand for Bitcoin and cryptocurrency in general. Overall, much of it can be boiled down to this: the cryptocurrency markets are highly speculative. Bitcoin’s value isn’t determined by a company’s financial performance or a national bank, so factors like company news, rumours of government regulations, and overall media coverage can cause huge price swings.<\/p>\n\n\n\n