What makes cryptocurrency fluctuate?

Cryptocurrencies are known for their extreme volatility, but that’s also why they are capable of producing such wealth. Over 1000% of crypto rallies are common, while a stock exchange might never see such gains in its entire existence.

This volatility and wild price swings is part of what attracts new market players over and over again with every major bubble, and with every new wave, the cryptocurrency market and market capitalization becomes much larger.

But have you ever thought about what actually causes the price of cryptocurrency assets to fluctuate in the first place? And is it possible to predict these fluctuations with a sufficient degree of precision to improve the rate of return? Let’s find out.

What is cryptocurrency? From Altcoins To Bitcoin

A cryptocurrency is an emerging technology built using a cryptographic computer code and involves storing assets on the blockchain. The computer code also powers a cryptographic protocol that protects the network against hackers or other security issues.

Cryptocurrencies first appeared when Bitcoin was born at the end of the Great Recession. The creator of the coin, Satoshi Nakamoto, also developed the first working example of blockchain technology with the introduction of Bitcoin. Since then, thousands of cryptocurrencies have been created each with a unique use case or purpose.

Ethereum, for example, isn’t just a currency like Bitcoin, it’s also a supercomputer that runs decentralized applications through a technology called smart contracts. Smart contracts are executable code that can be designed to run all kinds of technologies.

Smart contracts have enabled the creation of new subsectors of the cryptocurrency industry, such as NFT and DeFi. NFTs are non-fungible tokens that represent digital ownership of unique digital items. DeFi, or decentralized finance, is another disruptive area of ​​the market that offers lending and borrowing without authorization.

Why cryptocurrencies are still speculative assets

If this all sounds a bit confusing from a technical standpoint, don’t worry, you are not alone. Cryptocurrencies are a new technology that not everyone understands and that was designed to represent our point of view: Crypto is a speculative asset class.

People do not yet fully understand what technology does or the benefits offered by assets, let alone the value at which assets should be valued. Bitcoin is also another ideal and polarizing example. Experts claim it will go to zero, but those who support the cryptocurrency believe it will one day be worth millions per coin.

Because no one knows what these assets will or should be worth, the market can only speculate on what these prices might someday be, and any price action is the result of natural price discovery.

And because cryptocurrencies are speculative, they are highly subject to wild price swings due to extreme changes in sentiment. And with crypto, an interesting thing always happens – people always want to buy the coin when it hits all-time highs, but ignore buying the asset when prices are low.

Why crypto market sentiment is moving to such extremes

In early 2020, everyone expected Bitcoin to reach new heights. It was back to $ 10,000 for what seemed like the hundredth time, and finally got big. Then COVID hit and Bitcoin dropped to $ 3,000 on Black Thursday.

Investors were afraid to touch it lest it potentially collapse to zero if the economy continued to fall. But it doesn’t, and the opposite happened and the perfect storm in Bitcoin happened afterwards. Billions of dollars in stimulus money were printed when there were only 21 million BTC.

Talks about inflation and low interest rates have shifted the appetite for risk, and investors have loaded up on memes and crypto stocks. Bitcoin exploded from $ 3,000 to $ 60,000. At its highest, everyone expected Bitcoin to hit $ 100,000 or more. Still, it crashed badly at $ 30,000. Now, even though just a few months ago people expected $ 100,000, now they are expecting a return to $ 10,000 or worse.

Switching positions is a bad investment strategy, so it is often advisable for HODL investors, but it can lead to losses for years. This is why many choose to trade Ethereum and other cryptocurrencies instead.

Why trade cryptocurrencies instead

Markets are cyclical and rather than holding onto a bear market, those who have been in the crypto market for years are finally turning to trading. It can take even a single peak and trough to realize the potential gains left on the table by not trading instead.

For example, any investor who bought Bitcoin in 2020 did well until 2021, but then lost half of their earnings on the massive sell-off. But those who traded could have gotten profits from the rally to the upside, and even bypassed Bitcoin before the crash and profit from it on the downside.

Trading is best suited for speculative assets such as cryptocurrencies and can also be an ideal tool for inventors of stocks, currencies, and commodities. Trading these assets through CFDs such as derivatives provided by PrimeXBT allows for ultimate flexibility in position management.

This is especially useful for managing the highly volatile crypto market, which requires technical analysis tools, stop loss management, and more to survive. Over time, the volatility of each cryptocurrency will decrease as adoption takes place and more cash flows into those assets.

Summary

Low liquidity compared to forex, stocks or gold is also part of what makes crypto so wild, but it cannot be managed so easily. It is this situation of low liquidity and adoption that makes crypto more speculative of an asset class than those involved would like to believe. The solution to speculation is to trade rather than HODL, and only time in the market will tell.

Adoption is here, but it will move slowly and price discovery will be volatile and even painful along the way. Bitcoin and other assets like Ethereum will experience boom and bust repeatedly, with bullish and bearish phases in between. Knowing this in advance, would you prefer HODL and hope for the best, or is it time to consider trading cryptos instead?

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Catriona

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