What Makes Cryptocurrency So Volatile?

Kimiko G. Judith
Why Is The Cryptocurrency Market So Volatile?

Cryptocurrency prices tend to soar and crash for several reasons. Find out why below.

1. Decentralization

It is technically possible for anyone to mine for coins. Decentralization is one of crypto’s key features, but it also creates a trading environment full of unknown buyers and sellers.

2. Absence of a tether

Traditional investments, such as company stocks and diversified funds, are valued according to the companies they are attached to. Unlike gold and silver, cryptocurrency is not backed by a government or a commodity. The value of cryptocurrency is determined by its traders.

3. Confidence among investors 

Crypto coins can be mined by anyone with the technology, and they aren’t backed by the standard tools used to assign value to money, so investors may have difficulty placing their trust in them.

4. Limited oversight (if any)

Cryptocurrency is becoming more popular and investment firms are beginning to embrace it, increasing the likelihood of regulation. As regulation efforts evolve, however, crypto remains a relatively unencumbered arena for those who want to take advantage of volatility in the hopes of catching above-average returns.

5. Security concerns

Crypto assets are easy pickings for thieves due to their high prices that can be experienced in the cryptocurrency market. Crypto theft has increased nearly 1,000% year over year due to everything from hacking of digital transactions to fake currency exchanges and investment websites claiming to sell it.

6. Controversy

Crypto is scrutinized for its impact on the environment due to its energy consumption and physical servers required for coin mining, digital storage, and a high volume of transactions. Despite the industry’s rapid efforts to reduce emissions, there is still much to be done.

7. Low-cost insurance

Insurance options for cryptocurrencies are limited, even though the market appears to offer a significant opportunity for insurers.

Exchanges can hold coins in hot storage, which is connected to the internet, or cold storage, which is not (for example, in a safe). In spite of this, even large crypto exchanges like Coinbase keep about 2% of their coins with Lloyd’s of London.

8. Multi-step exit procedure

Exiting a cryptocurrency investment involves following multiple steps. Depending on where you store your crypto and whether you must transfer it to an exchange, the process varies.

9. Struggle for Widespread Adoption

Both merchants and governments are having trouble backing crypto. Elon Musk, Tesla’s CEO, recently announced that the vehicle manufacturer would no longer accept Bitcoin (Bitcoin Wallet) as a form of payment for its cars. He later said he would reverse his decision once crypto became more environmentally friendly. China has stepped up efforts to crack down on crypto.

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