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Why Are Cryptocurrencies so Volatile?

Introduction

With high risk comes high rewards. Other than blockchain technology, I am sure that many of us entered the crypto markets due to the dazzling opportunities and gains that cryptocurrencies can bring to your portfolio. It is known that being a crypto investor is not for the faint heart, where dramatic swings are an everyday occurrence. As much as this creates huge margins for investors to profit, it could also completely dig a hole in your pockets. In this article, we will talk about the reasons why cryptocurrencies are so volatile and what you could look out for to safeguard your interests.

Decentralization

Cryptocurrencies, unlike fiat money, utilize blockchain technology and do not require a centralized body. While that is a great strength of cryptocurrencies, it would also expose them to major issues with stability.

We enjoy stability in fiat because of the monetary policies set by the central bank accompanied by governing bodies to control its supply and demand. Without such measures in the crypto environment, the market would flow accordingly to market movements, causing the price of your crypto assets to move accordingly.

Types of Cryptocurrencies

If you take some time to analyze the price movement of each token, you will realize that different tokens have differing degrees of volatility. In 2021 alone, tokens such as Solana were seen to be 2x more volatile than Bitcoin. You should also watch out for projects that do not have a sound ecosystem, as you could very well be a victim of a rug pull, as seen in the Squid Game token that plunged to 0. After all, if you don’t understand a project’s tokenomics, chances are a bulk of the rest are clueless too.

Speculation and Media

We live in a digital era where information can be published with sonic speed, whether for better or for worse. Multiple incidents have been witnessed in the past where a single tweet from Elon Musk, caused huge price movements to $DOGE and $SHIB. After all, cryptocurrencies have no backing, where their value mostly leans on how much the masses deem them to be worth. Therefore, making it very susceptible to sudden swings from the slightest speculation.

Cryptocurrencies are Still Developing

As we emphasized multiple times, we can still consider ourselves early adopters of cryptocurrencies where there is still a lot of room for further developments. Constant developments are still being made, which would cause mixed reactions from investors.

Conclusion

There are so many wonders of cryptocurrencies that allow projects to take shape and evolve to what it is today. While cryptocurrencies bring vast advantages and possibilities to the table, we cannot ignore the volatility issue that it is notoriously known for. In order to further evolve and innovate as a community, it is crucial that we understand the underlying reasons that contribute to this problem. We hope that you’ve learned something from this article. Stay safe out there!

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CoinWind

CoinWind

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