Factors affecting the volatility of cryptocurrencies

Thanks to the digital nature of today’s world, investors are now conveniently plugged in through their smartphones allowing the value of cryptocurrencies to be tracked every second. Coupled with the volatility of cryptocurrency value, it is no wonder investors are constantly on edge 24/7.

Given the benefits of its decentralized and open-source properties, there is no doubt that digital currencies and blockchain technology are here to stay. However, the risk level when dealing with cryptocurrencies is not for everybody.

When investors respond to short-term volatilities driven by anxiety instead of objective assessment of long-term trends, they potentially miss out on the big picture. Just imagine the hysteria when Bitcoin plunged from its US$19,000 high last December, leading to widespread speculations of the cryptocurrency bubble bursting

Understanding some reasons as to why cryptocurrencies are much more volatile than other assets in the market can help investors better cope with expectations and make sound investment strategies.

Challenges in evaluating value

Cryptocurrencies lack intrinsic value capable of generating revenue like regular products or services. In addition, due to cryptocurrencies being a relative new asset, investors face challenges in evaluating their value through traditional valuation models. Used as a store of value (i.e. saved and exchanged for goods and services in the future), their worth directly corresponds to perception. This quality makes them highly susceptible to market sentiments and portrayal by the media, contributing to potentially dramatic contrasts between highs and lows.

Ill-informed investment decisions

Cryptocurrencies are inaccessible to an entire ecosystem of financial experts like brokers or financial advisors. Without this pool of expert investors, less experienced investors are in greater numbers, and may be prone to impulse buys or sells influenced by the slightest shifts in ground sentiments. To cultivate a long-term investment strategy, experts recommend selling an asset only after it rises or falls beyond a desired price point.

Large holders of cryptocurrencies

Volatility of cryptocurrencies have also been subjected to the influences of investors holding on to large portions of the total pool of digital assets available in the crypto-ecosystem. These investors can potentially create major shifts in the market upon the purchasing of new assets or the liquidation of their current holdings.

Traditional valuation models have not been adequate in explaining the true value of each crypto-project. It is imperative that investors educate themselves on the fundamentals of investment, including its associated technology. Cultivating innovation as participants in the crypto-ecosystem requires patience and a strategic look at the big picture, without being influenced by short-term hype. Focusing on the fundamental impact of each blockchain project, the community can work towards building a fairer and more efficient world.

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