A number of forces are pushing and pulling at currencies including Bitcoin, Ripple and Ethereum.
From just under $6,000 at the beginning of November to more than three times the value in the middle of December and then back down below $8,000 by the beginning of February, it’s been an incredible ride – with plenty of bumps and jumps along the way.
But while this makes for the market we all know and love, what causes the volatility in the cryptocurrency market?
Here are some of the major factors that underpin the market:
Before we look at external factors, however, it’s worth reflecting on the nature of cryptocurrencies. As a payment method that sits outside of central control and values privacy and security it’s easy to see why there’s great interest in cryptocurrencies.
This is also an asset that is new, disruptive and digital – all things that make it attractive to newcomers as well as experienced investors. Not only that but the excitement surrounding the likes of Bitcoin – which comes from the above factors – does, in itself, add to the hype around this, further inflating the value.
One thing that can bring the price crashing down to earth, however, is the advent of new regulation. As central banks and governments begin to catch up with the cryptocurrency phenomenon, more and more are considering introducing tougher new rules.
The tougher the rules, the bigger the chance of more dramatic price drops – especially if regulation erodes cryptocurrencies’ selling point of being decentralized.
The more the public buys into cryptocurrency – as both an asset and a means of financial transaction – the harder it will be to ignore. As more retailers begin to offer customers the chance to pay with cryptocurrencies, their use will continue to expand. If and when big names join the list, expect to see the prices jump.
Bitcoin isn’t the only show in town when it comes to cryptocurrencies. There are now a whole host of alternatives that offer slightly different strengths and features.
Competition is a double edged sword when it comes to value – helping to both expand the market as a whole and dilute the influence and impact of one particular cryptocurrency (albeit with Bitcoin clearly still king of the jungle).
New currencies and platforms are springing up all of the time as are devices such as ATMs. The better this technology is – and the easier it is to access – the more valuable this market is. Not only that, but a wider appreciation and understanding of blockchain also helps to boost the image of this market too.
Speaking of image, this matters too. Negative news stories – whether they be about scams or the use of cryptocurrencies for illegal transactions – can harm the reputation of this market, making would-be investors nervous about adding this asset to their portfolio. Panicked headlines about new regulations can also cause a ripple effect throughout the market too.
Another factor affecting Bitcoin is the fact that about 40 per cent of this asset is held by approximately 1,000 users. Many of these people – dubbed Bitcoin whales – are believed to know each other and talk about their investments.
If a few choose to act at the same time it can have a big impact throughout the whole market. Cryptocurrencies such as Bitcoin are not securities and, therefore, there’s actually nothing to stop a group agreeing to buy enough cryptocurrency to push the price up and then cash out within minutes.
Finally, it’s worth noting that the price is affected by the fact that don’t yet know many things about cryptocurrencies. While many people argue that Bitcoin’s price was inflated during a bubble in 2017, no-one truly knows its value.
It’s also unclear as to whether this will be primarily seen as a safe haven or risk asset, which means different people will continue to see it as both.
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