Cryptocurrency volatility is like stock volatility on steroids. And while there’s no standard way to measure the volatility of a certain digital coin as there is with stocks, all you have to do is look at some of the price charts from the big cryptocurrencies from last year and see the massive price swings that have made some investors super-rich and left others dead-broke.
So, why do crypto prices swing so drastically? Here are the main three reasons:
#1: No Institutional Support
There are no big institutions backing them! Big institutions insure other investments, but not crypto, making them riskier and more volatile.
If you compare cryptocurrencies to the U.S., you see that the dollar has a much more stable price and far lower price volatility based on the fact that it’s backed by the United States government. Stocks are similarly backed by large public companies that have gained a certain amount of public trust through the business actions.
Cryptos, on the other hand, are backed by blockchains, which are still a relatively new technology that has yet to be perfected. As public trust in cryptos increases and blockchain technology advances, crypto prices will probably start to level out. But, at the current moment, crypto technology is still in its nascent stage, and so it’s experiencing high levels of speculation.
#2: Questions About Real-World Adoption
We don’t know if they’re ever going to be adopted yet. While some companies are accepting Bitcoin as payment, it remains to be seen if cryptos will ever be used for day-to-day commercial transactions.
While some experts out there say that Bitcoin and other cryptocurrencies may someday have major applications for transacting in the real world, today, there is still a great amount of skepticism over whther or not these digital currencies will ever gain enough public trust to be widely used for daily commerce.
At the moment, crypto transactions use up entirely too much energy to be used in daily transactions; however, this is a problem that could be solved in the future. A lot of the perceived value of cryptos, particularly when it comes to Bitcoin and Ethereum, has to do with whether they can be eventually used as a transactional currency (like the U.S. dollar) rather than just an investment vehicle.
#3: Inflammatory News
The news! Someone hacked a blockchain. So-and-so endorsed Ethereum. Big banks started buying up crypto. All these things cause crypto prices to swing wildly!
It seems like every day some big piece of news comes out that affects the price of cryptocurrencies in a pretty extreme way. Just look at how much Dogecoin has exploded in the last year based on media hype and people talking about it on the internet. Bitcoin’s price dropped by around 30% following Elon Musk’s decision to stop accepting it as payment for Tesla vehicles.
Crypto news is one of the most highly-followed sections of the media these days, and the effect that that media has on prices is considerable.