Why are cryptocurrencies so volatile and what determines their price?

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Cryptocurrencies are back again and with no less than a bang. They are making headlines again and Bitcoin is breaking all the resistance put up by the fiat currencies . Yes, prudent cryptocurrency investors, traders and market observants are now considering upscaling their efforts. After all, will it be wise to wait to buy cryptos when the price of Bitcoin is already reaching for the sky? 

Most of the cryptocurrencies are still in their infancy and this makes them more volatile than the fiat investment options. So, what makes these cryptocurrencies  volatile, and are the factors that determine their prices? In this article, we will be answering this question so you can get a better sense of the market.

The reasons for the volatility of crypto markets are mentioned below:

• The number of investors in the crypto market is too small. This allows a small number of investors to control the majority of a certain cryptocurrency. These big investors are called “whales” and Elon Musk has just become perhaps the biggest whale of Bitcoin. 
• In crypto markets, the sentiments of the people towards a certain coin is more important than the project’s actual fundamentals. Unfortunately, this feeling can change in a heartbeat and is heavily influenced by news be they true or false. 
• There is a lack of trust in the cryptocurrencies but that is also ebbing away as Tesla and Twitter have started investing in Bitcoin.  
• BTC shares are another thing working to stabilize the price of cryptos in the market. They constitute a part of traditional financial products whose purpose is to track cryptocurrency prices featured by Grayscale Investments. Grayscale Bitcoin Trust gives crypto investors the opportunity to experience crypto through an open-ended private trust. This trust holds an excess of 649,130 BTC and that’s nearly 3.1% of bitcoin’s current circulating supply.
• The cryptocurrencies have been around for many years already, but unfortunately the prices of cryptos are still determined by investor demand. The halving of the Bitcoin was the pioneering attempt in this regard and was aimed at increasing the scarcity of BTC. People employed numerous methods that included token lockups, coin burns, and coin freezing to limit the supply, but it couldn’t make a significant difference. This remained until Elon Musk invested in Bitcoin with a billion dollar and sent the prices reaching for the sky. 
• Interestingly, it’s not just Elon Musk that is investing heavily in the crypto market. What’s happening right now is more of an institutional wave. Billionaire Ricardo Salinas Pliego from Mexico Media has invested 10% of his liquid assets in Bitcoin and Wall Street legends Paul Tudor Jones, Stanley Druckenmiller, and Bill Miller have also endorsed buying bitcoin. The Grayscale Bitcoin Trust has experienced inflows of almost $2 billion since October 2020. According to news, Twitter CEO Jack Dorsey and Musician/Singer Jay Z are investing 500 Bitcoins in the project.

The successful crypto traders are quite learned in the art of using the volatility of cryptos to their benefit. They use the technique of “buying the dip”  which is based around the idea of buying a cryptocoin at a local low. They then wait for some big investor to buy the coins which increases the prices and they then sell all they have to gain profits.

The timing of the market is crucial while trading and this is why it is recommended that you always learn from professional crypto traders before putting your money in the market.

Disclaimer: Please observe and adhere to your country rules governing digital assets and cryptocurrency at all times to avoid any legal consequences.

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