Over the last couple of years, crypto currencies have gained in popularity. After the rise of Bitcoin in 2009. the market for cryptocurrencies has boomed, and thousands of digital currency are in circulation. Cryptocurrency prices are very volatile. They fluctuate wildly on a day-to-day basis. In this article we’ll explore what causes the price of cryptocurrencies to fluctuate and how they can be so volatile.
Factors affecting cryptocurrency prices
1. Supply and Demand: Just like with any asset, the price is set by forces such as supply and demande. If the amount of demand is higher than the quantity available, then the price will increase. The price will decrease when the supply of a cryptocurrency exceeds its demand.
2. Market sentiment is a factor that can impact a currency’s value. Positive news can affect the market and cause prices to rise. Positive news can increase market sentiment. However, negative events, like regulatory crackdowns or news of a government shutdown, may lead to lower prices.
3. Prices are also affected by adoption. Individuals, businesses and institutions that adopt cryptocurrencies can affect the prices. Demand for cryptocurrencies will increase the more that people adopt them.
4. Technology: Developments in new technologies, innovations and the cryptocurrency market can affect price. In particular, blockchain technology can be used to increase efficiency and security in cryptocurrency transactions.
5. Market speculation is one of the major factors in cryptocurrency. Many investors, traders and other participants in the cryptocurrency market buy and trade cryptocurrencies solely to benefit from changes in prices. This can result in extreme volatility of prices.
Why do cryptocurrency prices fluctuate so much?
This extreme volatility can be due to many different factors.
1. Lack of regulation. Cryptocurrencies have a large degree of unregulation, meaning that their price can fluctuate wildly without intervention by authorities. Because of this, cryptocurrency is vulnerable to scams and fraud.
2. Cryptocurrencies lack intrinsic value. They are not traditional assets like stocks and commodities. They are priced solely by markets forces which can cause extreme volatility.
3. Limited liquidity. Most cryptos have a low liquidity. That means they can’t be easily traded in fiat currency. Limited liquidity can create extreme price swings when placing large buy and sell orders.
4. Hype and speculation. We have already mentioned that hype and speculative factors are key in the cryptocurrency markets. Price spikes can be caused by the hype of new cryptocurrencies, or even the newest blockchain solutions. However, once that hype wears off the prices will crash.