Speculative assets are considered worthless in the world of finance. The very idea of hypothetical assets is associated with scams and non-performing possessions that are valued far above their intrinsic value. The price of a risky asset depends on what someone is willing to pay for it. So, if people decide that bitcoin, or another cryptocurrency, is the future, they’ll buy it, and thus increase its price. But if they decide that it is of no value, its value will go down even faster than it rose.
However, that is not the only cause behind why the cryptocurrency market is so volatile. The future returns are more of a promise, instead of a bona fide guarantee. Some cryptos are classified as securities, likening them to ‘cash-generating assets.’ Token distribution coins such as Kucoin and NEO seem to fall under this category. But, even these are speculative in nature because their value is theoretical, i.e., they are dependent on market demand as well.
Veteran investors of cryptocurrency know these issues for a fact. They understand the volatility of the crypto markets and work with it to create profitable opportunities for themselves. Here are 7 of the top reasons why the cryptos are so volatile:
There is little to no intrinsic value in crypto
Yes, the initial valuations of Bitcoin and other cryptocurrencies have been huge. However, the fact remains that cryptocurrencies don’t sell a product, create a revenue stream, earn profits, or somehow provide employment to thousands of people. How does one assign a value to such an entity?
A minimal amount of the total value of a cryptocurrency goes into evolving it. There is no way of knowing if it is overbought or oversold. There is no method of determining if it is overpriced right now, or if it has a good value that’s ripe for investment. There are no precedents, or fundamentals that can provide us clues to these issues.
There is only one thing that the value is resting on: market sentiment. Crypto is volatile because the market depends on the moods and sentiments of media, marketers and crypto fans.
A complete lack of regulatory oversight
Cryptocurrency is taking over the world at lightning fast speed. Unfortunately, because governments don’t know how to deal with it, they are clamping down on it hard. There are little to no regulations guiding the growth of this phenomenon. This allows for market manipulation, which again leads to volatility in cryptocurrency prices. This is very discouraging for institutional investors because they don’t have any guarantees if their capital will truly be secure if they put in cryptocurrency. To top it all off, the arrival of new cryptocurrencies, such as the new AutoCoin, a crypto-related vehicle valuation system spearheaded by the Autoblock, adds to the mystery of the crypto market.
Lack of institutional capital
Institutional capital can’t seem to trust crypto with investments, even though many hedge funds and high net-worth people are fans of crypto. Banking heads, when off the record, will admit that there is some validity to the idea of cryptocurrency. But due to the abstract nature of this asset, they are still unwilling to commit significant amounts of capital or even participate in the crypto markets publicly.
This institutional capital can take many forms, it could merely be a trading desk charged with the task of softening market volatility and making it more efficient, or it could be a mutual fund making purchase for the long term, on behalf of large investors. The good news is that this is finally changing as we see some momentum on a possible crypto ETF.
Crypto order books are pretty much non-existent
Crypto investors know that exchanges can be hacked. And that’s why they never keep coins on these platforms, effectively moving the actual tradeable supply of cryptocurrencies off the exchange wallets.
Now consider the tradeable stocks of publicly listed companies and how all of these can be transacted on a single stock exchange. This makes investments easy and transparent. Cryptos, on the other hand, present several security challenges, especially for those who are still learning the tricks of the trade.
‘Slippage’ occurs easily in crypto markets when there is a large order capable of eating into a crypto exchange’s order books. The GDAX Ethereum flash crash is an extreme example of things that went too wrong, too fast. But less dangerous versions of this very same thing happen almost on a daily basis. And since large traders can tilt the market in any direction they want, the market becomes more volatile.
It’s an extremely long-term investment
When you invest in cryptocurrency, don’t expect to take out cash until you are 65. Since most investors already understand that, they are least bothered about the daily market fluctuations or even the yearly price movements.
Cryptocurrencies are generally inaccessible for retail brokers or even financial advisors, and that is how their market can curve an entire ecosystem of relatively short-term investors. In turn, these investors retaliate with doubts on the very foundation of crypto.
The only early adopters of cryptocurrency have been people who are comfortable with technology, and know how to deal with internet-based trading platforms and wallets. But the trouble is that these people are the ones who usually don’t have the patience to hold onto an investment for the long run, and they induce alarm in the markets leading to panic sells, and FOMO buys.
Cryptocurrencies are subject to herd mentality
Crypto was created as a reaction to the strict government and central bank rules over currencies across the world. Millennials were the early adopters because they distrust governments and loved everything tech. They also have next to no disposable income and a lot less time spent as an employee. This is a dangerous combination.
As a result of their circumstances, millennials are more prone to taking significant risks in the hopes of creating a landfall of cash for themselves. They are willing to bet money they don’t have, and really can’t afford to lose. It seems like millennials are working in tandem, but it’s each man for himself in the world of crypto, leading to a herd mentality of the sort.
The constant threat of regulation
Every few days we hear of some government ‘banning’ bitcoins or trying to regulate the crypto market in some way. From China and India to the United States, governments and old-school bankers don’t know how to deal with cryptocurrencies, and so they proceed by trying to fear people into staying away from the crypto market altogether. This, of course, contributes to the volatility of these markets.
It is essential to understand that cryptocurrency is here to stay. It is the wave of the future, and just like the stock market, it will eventually give way to long-term investors and holders. This volatility, however discouraging it may be, doesn’t take away from the viability of cryptocurrencies as an investment.
ABOUT Erica Silva
Erica Silva is a blogger who loves to discover and explore the world around her. She writes on everything from marketing to technology, and science. She enjoys sharing her discoveries and experiences with readers and believes her blogs can make the world a better place.
Find her on Twitter: @ericadsilva1