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Volatile Nature of Bitcoin and Other Cryptocurrencies

The nature of bitcoin volatility

October 9, 2020 | 

JOHN K MWANIKI |  0 Comments| 

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The crypto world has become integral in the world economy. Cryptos are becoming mainstream as the fiat currency keeps faltering. While the adoption is increasing, digital currencies are still facing volatility concerns.

The coins fluctuate a lot. Trades are never too sure of the exact value of their investments. The price changes can be as fast as even within minutes. Some traders have learned how to make the most out of the price changes. Still, others have lost money in the process.

Here is all you need to understand about volatility in cryptos;

Reasons for Volatility

Here are the top reasons for the sustained volatility in cryptocurrencies;

  • Crypto is an Emerging market.

It's been barely over a decade since the cryptos became a thing. It started with Satoshi Nakamoto's white paper on Bitcoin. The crypto market is yet to become defined. 

As an emerging market, most actions affect the prices. For example, whale traders can trigger price fall by releasing some assets. 

  • Lack of Regulation 

The regulations in the crypto world have been an issue of concern. Most governments have let the cryptos operate freely as digital assets. The lack of control means the crypto relies on its decentralized nature for value. No party directs supply; thus, the price can move in any direction.

It's now when governments are looking to start regulating cryptos. The European Union already has a plan to regulate all digital assets. Nigeria's SEC is also planning to regulate the coins once they become assets.

  • Lack of physical backing 

Cryptos have no physical backing from any commodity. It relies on the free forces of demand & supply. The market forces work, such that an increase in demand leads to increased values. After some time, the traders would start selling before a market correction. This leads to reduced demand as the cost goes down. It then starts all over again.

  • The role of media

Like any other market, the current happenings impact cryptos. The media has become integral in crypto values. Traders rely on the media to determine possible market growth.

The only concern is that social media is one of the integral news sources. The lack of regulations on social media means it can be a tool of speculation. Users are always looking to provide information as fast with even faster impacts. 

  • Investor profiles

The type of investors also determines the stability of an investment. Starting to trade in Cryptos is easy. You only need some little money and internet access. This is different from traditional stocks. Those require expertise and lots of money. 

The lack of experience in crypto traders means they are susceptible to emotions.

How to keep safe when investing in the Volatile Cryptocurrencies 

Even though cryptos are volatile, they are quite lucrative. You only need to find a way to manage the volatility. Here are some of the ways to invest safely;

  • Research

Do not rush into putting your money in cryptos before understanding the market. The volatility in Cryptos varies within the different cryptos. Some tend to be too volatile. 

Understand the risks and possible returns with every coin. There are also less volatile ones like the StableCoins. Their values are pegged to other commodities. Tether, for example, has its value pegged to the USD. Still, they come with risks. The coins have faced controversies

  • Invest the money you are willing to lose

The main reason for investment is the returns. Even though the same applies to cryptos, you also have to understand the risks. There is always the chance that you can lose money. Only put the amount you will be okay if lost. 

Also, look out for coins that offer assured returns in crypto. They mostly turn out to be scams. Even though it might sound self-defeating, the risk is worth it if it works.

  • Diversify investments

Every ardent trader understands the need for not putting "all eggs in one basket." The same applies to cryptos. The volatility rate varies with different coins. You can only take advantage of the various market movements through diversification.

For example, Ethereum has been one of the best cryptocurrencies in the year. The same period has also seen Decentralized finances emerge. 

Some digital currencies can also value until they disappear. Diversification allows you the needed back up. 

  • Become immune to FOMO

Most crypto traders are afraid of losing money. They tend to react to every price movement. This leads to even more losses as they don't keep to a trading strategy.

Keeping safe requires you to have a specific goal. Use tools like technical analysis to understand the possible price movements. After which you invest depending on what you intend to achieve. Don't react to the market movements before hitting your target. 

Will cryptos become stable? 

The possibility of cryptos becoming stable is a concern for most in the cryptocurrency. Traders are longing for a time that they won't have to keep monitoring the market movements all the time. 

Every indication is that virtual currencies will become stable in the long run. The coin has been attracting users. There has been an influx in the crypto service providers. 

Crypto exchanges, wallets, and payment processing platforms are becoming more commonplace. These services come with increased liquidity. 

The improving regulations are also significant for market stability. The regulations mean a defined market practice. 

It comes with reduced price manipulations hence trader confidence. Confident traders are devoid of FOMO hence more stability. 

The cryptocurrencies have also started to attract institutional investors. They have avoided the cryptos for the longest time due to the volatility. Warming up to cryptos is a sign that digital currencies are becoming more stable. 

Bottom Line

Volatility is a double-edged sword concept in the crypto world. Traders either gain or lose a lot due to the market movements. Either way, there is a need to observe market movements before investing. You need clear targets when placing your money on the asset.

Recent market developments show possible stability in the long run. The increased regulations and institutional investors are the major indicators. Still, not all the crypto traders are up for the prospects of a stable crypto market. They become so used to the market movements. A stable crypto-economy would end up as boring.

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