Volatility, in simple words, means the fluctuation in the price or value of a commodity or an asset. There are several factors that affect the volatility of an asset. Understanding and predicting changes in the prices of a commodity at a future date is difficult. However, predicting the future price and the stability of different assets in the near and long-term future is essential from the point of view of investors.
Investors invest their money to buy assets that will have them achieve a good margin of profit when they sell the asset. It is natural that investors want to invest in goods like gold, stocks and cryptos, which have a great demand at a global level.
There are several reasons why the price of a cryptocurrency may fluctuate, and some of these factors are listed in the article below.
Reasons Why The Price Of A Crypto Does Not Remain Stable Over Time
If you are an investor, you must factor in the element of volatility before you invest your hard-earned money. So if you wish to invest in cryptos, go to Bitcoin SV in order to avoid large scale price fluctuations.
1. The Law Of Demand And Supply
Bitcoins and other cryptocurrencies are decentralized digital currencies whose transactions happen through a peer-to-peer network. Thus, crypto is not a typical currency like gold and silver bullion or currency notes; however, its price does follow the laws of demand and supply.
The basic tenet of the law of demand and supply is that the price of any good or service depends on the balance between the demand and supply forces for that good or service. So if the demand for a particular good increases, its price rises and if its supply increases, then its price falls. So every time the demand for crypto rises, its price rises.
However, with assets like cryptos, the fall and rise in price are usually very rapid and very frequent. So the rapid rise and fall of the price of a crypto is what makes it highly volatile. And this volatility associated with digital assets makes them an asset of choice for investors who like taking risks and those who have a lot of funds.
So investors who can absorb the loss if the price falls suddenly invest despite the volatility because they want to register maximum profits when the price rises rapidly. However, today the crypto market is not restricted to just high-net-worth individuals. Today even small investors want to park their funds in cryptos, and for them, keeping an eye on the volatility of the digital asset becomes important.
Factors that can increase the demand for a given crypto are a high rate of returns, the acceptance of a given currency as a legal tender by some country etc. And the factors that reduce the demand for a given currency are the banning of a currency by any national government or the emergence of severe competition from other cryptos in the market. Some of these factors are discussed further in the article.
2. Speculative Rise And Fall Of Price
The demand for a given commodity can increase for reasons like a commodity having great features. So if one-day crypto becomes highly liquid or if it becomes acceptable by most governments and big corporations, its value is bound to increase.
However, at times the demand and the value of an asset increase or decrease without any solid or tangible reason. This happens due to speculation. If people speculate that a given commodity will become scarce in the near future, they will stock up on that commodity, and this will create a shortage. However, many people create mischief and mislead investors by spreading false rumors about shortages or excess supply.
These rumors help change the investor’s sentiments, and they push the price up or down simply based on speculation. Any rumor in the market and any speculative buying or selling that it results in creates mass hysteria. So the changes in the value of any commodity become huge within a very short span of time.
3. Government Regulations And Volatility
A national government’s acceptance or crackdown on any asset, including cryptos, has a serious impact on the price volatility of that asset. In the year 2021, El Salvador, a Central American nation, became the first country in the world to accept Bitcoin as a legal tender. With this announcement, the global acceptability and the value of Bitcoins saw a sharp rise.
According to reports, Bitcoin saw a jump of six percent, and its value became equivalent to thirty-seven thousand dollars. In fact, when the value of Bitcoins fell by twenty-one percent in the year 2022, the Central American nation lost around seventy million dollars from its public finances.
On the other hand, when the People’s Republic Of China carried out a crackdown on Bitcoins in 2021, its price fell by almost thirty percent. The reason why there was such a sharp fall after the Chinese crackdown has probably related to the fact that China is a big economy and has intricate trade relations with almost all nations of the world.
Even today, many governments across the world, including the most developed countries of the world, do not accept cryptos and Bitcoins as legal currency. Many central banks are worried about the huge volatility of digital currencies and the impact that they can have on the market. However, with time most countries have started adopting cryptos in one way or the other.
Apart from the factors mentioned above, there are other factors, like the value of other precious commodities like oil, which also affect the demand for cryptos. Moreover, trade wars and economic recessions are also likely to affect bitcoins.
Predicting and accounting for all the factors that affect the value of a digital asset is quite complicated. However, if you are a retail investor, you must research the price movements of a digital asset before you make any investment.