Cryptocurrency markets can be unstable. Since their emergence, cryptocurrencies such as Ethereum and Bitcoin have seen dramatic price jumps and drops—sometimes within seconds, many investors scratching their heads and asking how such turbulence can arise.
Many traders and investors are concerned about financial volatility regarding cryptocurrencies. So, what causes the cryptocurrency market to be so volatile?
Because the market is so volatile, you must trade your cryptos and stocks through a reputable exchange platform like Deriv. For a further detailed analysis of the pros and cons of Deriv, you must check out the platform and test it yourself. Remember, while you are unsure about the crypto market, a trustworthy crypto platform will safeguard your assets and funds.
Why is Cryptocurrency Market So Volatile?
Cryptocurrency is a high-risk, high-reward investment asset class. To trade it, you need to do a lot of research and understand the technology and market forces behind it.
Cryptocurrencies are inherently volatile. It is speculative and unregulated. Thus, cryptocurrencies fluctuate more unpredictably than equities and bonds.
1. Demand and Supply
Understanding how cryptocurrencies’ supply varies as more customers buy them and the mining process creates new coins is crucial to understanding their volatility. Demand for Bitcoin and Ethereum raises their prices. Because there is only 21 million Bitcoin, demand exceeds supply, driving up prices.
However, when more coins become accessible, more individuals will want to buy and sell them, lowering their price. Thus, market competition may reduce costs.
2. Hype and speculation
One of the primary contributors to cryptocurrency price movements is prediction and hype. When a new crypto is released, there is usually a surge of enthusiasm as people discover it for the first instance. This frequently encourages people to purchase the new coin, driving the price to catastrophic heights.
When individuals believe the coin is overpriced and make a loss on it, the euphoria and speculation fade, resulting in a price decline as the bubble bursts. It’s very uncommon for cryptocurrencies to suffer massive rises followed by falls.
3. Production Costs
The cost of creating tokens is determined by two primary factors: the network’s hash rate and power usage. Miners compete to solve complicated mathematical problems to be rewarded with new tickets in a proof-of-work system, such as those employed in Bitcoin and Ethereum. The more the competition for mining a particular cryptocurrency, the more challenging it is to mine and the less economical it is for miners to keep drilling it.
Miners may give up and migrate to another cryptocurrency if their mining efforts are no longer profitable. However, this causes short-term fluctuation in cryptocurrency prices as miners shift to more valuable tokens or hold onto tokens for more extended periods. This volatility may impact specific coins’ long-term performance, causing them to lose a market share over time.
As a result, as mining expenses rise, so does the value of the coin. Miners will stop mining if the worth of the currency they’re generating isn’t sufficient to cover their expenses.
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