Cryptocurrency and Price Volatility
Cryptocurrency provides a safe haven for your money that is not a part of the mainstream financial system as all cryptocurrency transactions are anonymous and outside the purview of the government. But this has not been without risk. We’ll take the example of the most widely used and valuable cryptocurrency of recent times which is bitcoin. Bitcoin was one of the first cryptos to enter the market and had a rapid rate of adoption but has seen massive swings in its value over the course of its lifetime. It has been quite volatile since the beginning but the last few years have been a wild ride for investors seeking to profit off of the digital currency. While some people have made millions with an upswing, others have lost both large and small bitcoin savings with equally brutal downward swings.
Hence, even though bitcoin can prove to be a worthwhile investment it’s best to be aware of the risks associated with it to prepare for the worst and minimize losses or even rake in profits by being smart about crypto management. The main two risks with bitcoin investment are: highly volatile exchange rate and investor uncertainty.
Here we can outline the main few factors that impact the main risks associated with bitcoin and cryptocurrencies in general:
Cryptocurrency has garnered much press and media attention over the past decade but despite all the commotion surrounding the digital currency, it is a very new market, especially compared to the traditional fiat currencies and commodities like gold. Even during the peak of bitcoin, its market cap was very small compared to the stock market in the United States.
The smaller size of the market means that certain key factors or players can have bigger effects on the entire bitcoin currency. Such as a massive investor buying or selling their holdings can result in slight fluctuation of the price. Other similar factors can have ripple effects all over the bitcoin economy. But this smaller and emerging market also creates opportunities for exciting opportunities such as a new company entering the market with a product that can grow in popularity quickly and receive larger attention than in the fiat market.
Cryptocurrencies like bitcoin are purely digital assets meaning they are not backed by the government or any independent financial entity. Its price is mostly determined by the law of supply and demand resulting in higher and quicker fluctuations as there is no central entity governing the price. Because of this, the price of bitcoin can tend to gravitate towards both extremes. Media hype and artificial demand can result in a hyper-inflated bubble which is then followed by market correction and a sharp fall in prices. Hence, knowledge about typical bitcoin price movements can be necessary for short-term investing. Long-term investing tends to be safer as the price tends to correct itself sooner or later.
Cryptocurrencies like bitcoin work based on a decentralized technology named Blockchain. It keeps track of all the digital transactions happening in the bitcoin network. The technology is still new and rapidly developing. Since crypto transactions are completely dependent on it unlike fiat currency, any congestion or problems in the blockchain can affect the service for millions of people. The network congestion can also result in higher transaction fees which are not desirable as one of the key attractions of bitcoin is lower transaction costs than traditional banking transactions. But since the technology in bitcoin is so rapidly developing, it leaves a lot of room for new technologies to develop and take the space of current ones diversifying the available tech for use in bitcoin.
Speculation, media hype, and investors all work in tandem to determine the price of bitcoin. The heightened speculation can lead to media promoting or criticizing bitcoin which can lead to newer investors buying or selling their bitcoin assets. Since bitcoin is purely digital, there’s little to no entry barrier for a new investor. All a person requires is their payment card and a crypto wallet to buy and sell all kinds of cryptocurrencies. Hence it becomes even more important to research and study bitcoin and its behavior to make informed investing decisions. A smart and focused strategy can lead to some great returns over time making it imperative to avoid amateur mistakes when working with this new age currency.