The cryptocurrency market is volatile and full of surprises, making it hard to understand why the prices of cryptocurrencies are fluctuating. The answer to understanding these market fluctuations lies in a blend of macro-economic and deep market forces. In this article, we explore the fundamentals behind these dynamics and explain why the cryptocurrencies market is so volatile.
Economic Factors and Market Volatility
When discussing market volatility, economic forces are an important factor to consider. A look at the current economic conditions shows forces like inflation rates, GDP growth, regulations, taxes, and central banking policies driving the global investment markets. These economic parameters are known to play a pivotal role in crypto markets as well. For example, the prices of Bitcoin have been strongly correlated with inflation rates, with majority of BTC’s market changes reflected in US CPI data since 2008. Similarly, economic policies like the US Quantitative Easing program resulted in an influx of capital as investors sought for safer investments in 2020, leading to Bitcoin’s meteoric rise.
Speculation and Market Fluctuations
Cryptocurrency markets are also driven by speculation by investors. Digital currencies are prone to extreme volatility due to speculation caused by FOMO (fear of missing out) or hope of “getting rich quick”. With its decentralized and unregulated structure, the cryptocurrency market often works as an ideal breeding ground for speculation and market manipulation. Fears of market manipulation have been around since the early days of Cryptocurrency with certain market conditions and large price spikes leading to manipulation speculations by investors. For example, a concentrated surge in Bitcoin prices in 2017 led to accusations of market manipulation. As a result, governments and financial authorities have intervened by introducing regulations and safeguards in the cryptocurrency markets to limit manipulation or fraud.
Cryptocurrency as a Store of Value
The store of value is one of the most important properties of money and to some extent, this property also suggests that crypto currencies must be volatile. Most crypto enthusiasts argue that Bitcoin and other digital currencies are extremely valuable assets. Compared to traditional government-backed fiat money, Bitcoin and its crypto counterparts are believed to be a better medium of store of value. Cryptocurrencies like Bitcoin, Ethereum and Litecoin provide an alternative, efficient, secure and convenient medium that is uncorrelated with any national economy, further cementing its status as a store of value.
Cryptocurrency volatility is affected by a combination of economic factors and speculative trading. To be able to understand the market it is key to have a deep understanding of both these forces. That being said, many crypto currencies are also increasingly being seen as a valuable store of value, making them attractive investments for many. With the right set of tools, strategies, and risk management, crypto-trading can be highly rewarding as well.