Why Are Cryptocurrencies So Volatile? When Will Prices Stabilize?
While plenty of investors are already engaged in Bitcoin, Ethereum, and the hundreds of other cryptocurrencies now floating on the open market, many others are hesitant to jump in. The main thing keeping investors away from cryptocurrencies is price volatility.
For example – while Bitcoin peaked at around $3,000 USD per BTC this year, it also plummeted to around $2,500 in the month of June, wiping out $3.4 billion of stakeholder value before rallying and gradually working its way back up.
Potential investors are rightly concerned that if they buy in now, they may see their assets wiped out by another "flash crash" of this sort. At the same time, potential users are waiting for cryptocurrency to become a more widely accepted form of payment. Both of these things will only happen once volatility dies down.
Understanding Volatility
Volatility is by no means unique to cryptocurrencies. Gold is a safe-haven asset prized by investors for its stability, but only because it is no longer the standard value underpinning national currencies. During the era of the Gold Standard, gold prices were incredibly volatile.
Paper money is no different – between the First and Second World Wars, the value of Weimer Germany's Reichmarks hyper-inflated to impossible proportions, ruining the country's finances. The same thing happened less than a decade ago in Zimbabwe when the farming industry was redistributed.
Importantly, these historical instances of currency volatility occurred because of government intervention – something that cryptocurrencies are pretty well shielded against since they share no central authority. In this sense, cryptocurrencies – especially Bitcoin – are somewhat like gold:
- Both are durable. Neither gold nor cryptocurrencies "expire" in any meaningful way, like paper money does.
- Both are fungible. Fungible currencies are ones where a specific unit can be replaced for any other. An ounce of gold is worth an ounce of gold once it is melted and purified. A Bitcoin is always worth whatever the market says Bitcoins are worth at the moment.
- Both are scarce. There is a finite amount of gold on Earth. Likewise, the Bitcoin protocol stipulates a hard limit of 21 million BTC – the most that will ever exist.
When it comes to cryptocurrencies, volatility happens for a slightly different reason – speculation.
Cryptocurrency: Investment Vehicle or Currency?
In the absence of a centralized authority empowered to assert cryptocurrency market values, market participants produce value through speculation and investment – a particular coin is worth what the market will pay for it. Since that price changes as people invest money and withdraw profits on a constant basis, stabilization has not yet occurred.
This is a common situation for novel investment vehicles and commodities. One of modern history's first examples of this is Dutch Tulip Mania – where imported tulips obtained astronomical prices before crashing. Speculative bubbles have risen – and popped – ever since.
However, calling the current flurry of activity in cryptocurrency markets a bubble would be unfair. Unlike tulips, you can spend Bitcoins and Ethereum tokens on goods and services. The reason that prices are volatile right now is because people can't spend their cryptocurrencies on any good or service. These currencies have not yet permeated financial culture enough to be widely accepted.
Once enough major brands and governments adopt cryptocurrencies as a valid form of payment, price volatility will slow to rates not uncommon on Forex markets. Speculation will become less profitable, hedging the system's bets against speculative bubbles and allowing every day people to focus on the use of cryptocurrencies, rather than their values.
Thanks for reading.
Cheers.
Ckcryptoinvest
I think we overestimate the demand for stable cryptocurrencies. Many stablecoins have come and gone, and then we have the pegged bitUSD and the USDT IOU, but people use them only for hedging. Most people are interested in crypto because of potential capital gains, not the tech per se. Maybe things could change if there was a cryptocurrency which was stable and appreciated constantly and predictably in value, if it was marketed to the masses as such.
Your post is great and i absorbed alot from it. The following are the points i am repeating again and again to memorize.
Both are durable. Neither gold nor cryptocurrencies "expire" in any meaningful way, like paper money does.
Both are fungible. Fungible currencies are ones where a specific unit can be replaced for any other. An ounce of gold is worth an ounce of gold once it is melted and purified. A Bitcoin is always worth whatever the market says Bitcoins are worth at the moment.
Both are scarce. There is a finite amount of gold on Earth. Likewise, the Bitcoin protocol stipulates a hard limit of 21 million BTC – the most that will ever exist.
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good post
Very informative. Enjoyed reading this post.
Whats your view on regional cryptocurrencies? I feel that in smaller countries and "city-states" I think the adoption rate might be faster. I am following dubai very closely in this regard.
People are waiting to get involved but are hesitating due to this volatility. But they will come in eventually due to the Fiat currencies around the world. People are waking up to the fact that while their purchasing power of these fiat currencies are heading down...Cryptos are moving steadily up (with large dips of course).
Cryptos are still relatively new. I think new ICOs , profit taking and the next new thing increase the price volatility. I think they will stabilize more over time and cryptos are a great hedge against inflation. I prefer to buy and hold, so the dips give great buying opportunities. Thanks for posting.
Am i the only one seeing a bubble brewing with the cryptos?
With ICOs springing up all around and attracting the attention of gamblers as against investors (the difference is one places his fund baased on evaluation while the other just wants to cash in with the boom) and once there is a little blip in the ride there would be moves to either take profit or cut loses which would further depress the prices as there would be more sellers than buyer (law of demand and supply kicks in). This would result in the demise of most cryptos but a few would bounce back stabilise and be there for the long haul.
Good risk/reward consideration and funds management is advised in the coming months .
But hey! while you can make as much as you can.
Units must purchase pine sol before value diminishes. Much pine sol @ckcryptoinvest
Mining is causing difficulties to spike fast, do you think that will affect the volatility?
I have an analysis on cloud mining profits but its all subject to price volatility...
I have my analysis here if anyone wants to check it out
https://steemit.com/genesis/@corpsecreate/cloud-mining-profitability-analysis
Ok thanks for the information
Unlike tulips, you can spend Bitcoins and Ethereum tokens on goods and services. The reason that prices are volatile right now is because people can't spend their cryptocurrencies on any good or service.
Back to back sentences that seem to contradict each other. Which idea to you want to keep?
STEEM On!!
Dave
Am i the only one seeing a bubble brewing with the cryptos?
With ICOs springing up all around and attracting the attention of gamblers as against investors (the difference is one places his fund baased on evaluation while the other just wants to cash in with the boom) and once there is a little blip in the ride there would be moves to either take profit or cut loses which would further depress the prices as there would be more sellers than buyer (law of demand and supply kicks in). This would result in the demise of most cryptos but a few would bounce back stabilise and be there for the long haul.
Good risk/reward consideration and funds management is advised in the coming months .
But hey! while you can make as much as you can.
prices are arguably in a bubble right now. no one should be surprised by a drop of 50%
Hope that won't happen soon since I make some profit on this :D
Bitcoin, the "older brother" to all other cryptos out there has been around for nearly 9 years and has been declining in volatility.
Here's a site that tracks 30 and 60 day rolling values -- https://www.buybitcoinworldwide.com/volatility-index/
It shows that even though we're in a 4% range, it still isn't too far removed from Forex traded currencies or other financial instruments. This will only improve as further inroads are made with users.
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Good article, but it also has to do with the SegWit:
https://steemit.com/bitcoin/@cryptopaul/when-are-the-cryptocurrencies-going-up-again
I get frustrated that speculation on so many coins over-rides the real value proposition, either over or under valuing them. Look at the recent spate of ICOs, giving over millions of dollars to people based on nothing but a website and a white paper, while actual working coins are ignored; bizarre.
Am i the only one seeing a bubble brewing with the cryptos?
With ICOs springing up all around and attracting the attention of gamblers as against investors (the difference is one places his fund baased on evaluation while the other just wants to cash in with the boom) and once there is a little blip in the ride there would be moves to either take profit or cut loses which would further depress the prices as there would be more sellers than buyer (law of demand and supply kicks in). This would result in the demise of most cryptos but a few would bounce back stabilise and be there for the long haul.
Good risk/reward consideration and funds management is advised in the coming months .
But hey! while you can make as much as you can.
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Great post, thank you for the info.
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Such a nice post. I just upvoted this post. Cheers :-)
I hope you like this post on similar lines:
https://steemit.com/cryptocurrency/@shrirang/where-are-cryptocurrencies-headed-in-rest-2017
Is it safe to invest in cryptocurrency?
I think there are "safe" coins like ETC or RIPPLE but mostly "ONLY INVEST WHAT YOU ARE WILLING TO LOOSE"
Am i the only one seeing a bubble brewing with the cryptos?
With ICOs springing up all around and attracting the attention of gamblers as against investors (the difference is one places his fund baased on evaluation while the other just wants to cash in with the boom) and once there is a little blip in the ride there would be moves to either take profit or cut loses which would further depress the prices as there would be more sellers than buyer (law of demand and supply kicks in). This would result in the demise of most cryptos but a few would bounce back stabilise and be there for the long haul.
Good risk/reward consideration and funds management is advised in the coming months .
But hey! while you can make as much as you can.
Intersting words thanks a lot. Feeling better after reading ;-)
I am also confused trading since 3 month with 300%++ but was at 600%. I am buying and buying the right things now. And I think these days many coins are cheaper then ever.
one thing you didn't mention is that the coin prices are being manipulated by the community. If you don't agree, review the trollbox chatter on btc-e.
Thanks information :
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STOPwho want it to stabilize, NOT ME! Big volitility = big money
A lot of cryptocurrencies trade on low volumes. Any new information or bigger then average buy/sell-orders can have a more exacerbated impact in such an environment. Having not a lot of spending opportunities is helping neither. An article about (mass) adoption of innovative technology: https://steemit.com/bitcoin/@remyremy/a-50-drop-in-a-couple-of-days-and-a-35-recovery-in-24-hours-should-you-worry
Thanks for an informative post! :)
thanks
Very informative and detailed. I think there are some good points in here especially about volatility and tulipomania. We will just have to hope for some stability and a return to normality in the cryptocurrency market.
Thank you. This was very informative..
nice post keep on steem
@ckcrytpoinvest great article 👌👍
Upvoted and following
Also, the technology hasn't quite met up with where the demand will be. Look no further than bitcoins "scaling issue."
Am i the only one seeing a bubble brewing with the cryptos?
With ICOs springing up all around and attracting the attention of gamblers as against investors (the difference is one places his fund based on evaluation while the other just wants to cash in with the boom) and once there is a little blip in the ride there would be moves to either take profit or cut loses which would further depress the prices as there would be more sellers than buyer (law of demand and supply kicks in), Because they are in for profit as against distruptive long term use. This would result in the demise of most cryptos but a few would bounce back stabilise and be there for the long haul.
Good risk/reward consideration and funds management is advised in the coming months .
Acceptability and use would ultimately determine intrinsic value and stabilize prices within a reasonable band
Its a good investment for near future. Believe it would be new world currency such as current paper cash.
These cryptos are what we need today! Thank you for the post and information!
Cause the market is volatile.
This was an excellent post and I agree with most of it except for some... Gold is also government owners in the sense of the world government being the Rothschild and other huge families. They literally have like 98% of gold stored away which will never be seen in day light in order to keep the prices inflated, same with diamonds.
I think bitcoin will see a massive rise after august the 1st or somewhere in the first weak, it may even hit ATH once again, spectating and waiting to see.
Thanks for the informative article.
Hey, good luck on your journey in our fine community! I'll follow your account to see how you doing :). Please follow me @nakedchef89.
This crypto market is wild. In order to make money from trading Altcoins one has to get in near the bottom on a red day and sell before everyone else dumps it. In the process those who missed their exit are stuck bagholding.
Great post. As a stock/options trader, volatility is very important to me...nice to read someone talking about its' implications for cryptocoins.
I would point out, though, as you fiat curreny ("paper money" as you put it) i extremely volatile as well..Almost 24/7, currencies from across the world are trading on the various forex exchanges. While it might easy to pass that off, because most of the times these changes are .001. But because it's currency that people and businesses use everyday, those small changes can most definitely have a large impact on the transactional value of that currency when doing something with your country's currency that involves another country and theirs.
With that said, good post!
Hey, good luck on your journey in our fine community! I'll follow your account to see how you doing :). Please follow me @nakedchef89.
Very useful, thank yuo and follow
Baron Rothschild, of the famous banking dynasty, said the best time to buy was " when there is blood in the streets.
Quite an informative post.
So a time will come when speculation will be less profitable. I think I get that.
Really liked this post.
Thank you.
If you want low volatility cryptocurrency you should check STABLE project ( https://stable.foundation/ ). We will create Stable token (“STB”), which construction is aimed at delivering much lower (about 5-10 times lower) price volatility than the most established tokens. Therefore we will provide a social service of closing price differences between different digital tokens markets and geographies via custom made algorithms. But we will not promise anyone to make 200%-300% profits. More details you can find on our web page (ICO is in progress). The Stable will have a form of ETH-based tokenized arbitrage hedge fund.