• Today is: Friday, December 6, 2019

What makes cryptocurrencies so volatile?

When Bitcoin was mined for the first time, in 2009, few people in the world knew about cryptocurrency. Slowly but surely, Bitcoin started to get attention from tech enthusiasts and eventually reached the masses. Bitcoin’s worth grew exponentially in 2017 – and so did its popularity. In December 2017, one Bitcoin was worth close to 20 thousand dollars: $19,650.01 at its peak. Cryptocurrency enthusiasts believed this was nothing but the beginning. But a year later, in December 2018, one Bitcoin was worth, roughly, $3500. Six months into 2019, in June, one Bitcoin was worth more than twice than that, at over $10,000. In three years, the most important cryptocurrency doubled its price only to fall to a fraction of its peak and eventually doubled again to fall down one more time. And every time Bitcoin goes up or down, the rest of the cryptocurrency world follows. What does cryptocurrency have that makes it so volatile?

The first thing you have to know about cryptocurrency, it’s the market’s size. If you put every single cryptocurrency together -not just bitcoin, but others as well, like Maker or Ethereum- you would be talking about $800 billion. That might seem like a lot of money. But, for example, the gold market is worth almost 8 trillion dollars. Right now, the entire cryptocurrency market is worth eight times more than Jeff Bezos and one hundred times less than the gold market. If Jeff Bezos decided to place its entire net worth into crypto, he would control 1/8 of the entire market. If he did the same with gold, he wouldn’t even make a dent on it. And if you are talking about Bitcoin alone, Jeff Bezos could own every single coin there is, and still have over half of his net worth untouched.

Due to the small size of the cryptocurrency market, you don’t need a lot of money to sway the price of one single cryptocurrency, whether it is up or down. But this isn’t entirely bad. If you decide to invest in crypto, you can earn a lot of money quickly – or lose it all in one volatile day.

Cryptocurrency is extremely susceptible to speculation. Rumors of a bad quarter can decimate Apple’s stock price the same way a rumor of a cryptocurrency shooting up or crumbling down can make it exactly do that. A big part of Bitcoin’s 2017 peak was due to the speculation of a never-ending price spike. A big headline on mainstream media regarding a particular cryptocurrency can make the price go up tenfold. This is a bad thing if you consider it as a consequence of market size alone. But you have to understand cryptocurrency is moved only by buyers and sellers -unlike fiat money or stocks, controlled fully or partially by the government-. Even if it allows wild speculation, crypto’s worth is decided by the market. Once that market grows, speculation will cause less harm to cryptocurrency’s prices. It’ll happen naturally and not due to government regulation.

Cryptocurrency does not only have an infant market, but it relies on infant technology as well. Nobody truly understands cryptocurrency’s full potential. Blockchain -the technology crypto relies on to work- has new developments every day and potential new risks every day as well. As Blockchain advances further, new ways to use cryptocurrency arise, like tokenization. This may increase crypto’s value, but it may also create new problems or risks, making it seem less attractive as an investment. Blockchain is merely 28 years old. And cryptocurrency is only 10 years old. It’s an incredibly new technology and every development can shoot the price to the stars or decimate it entirely.

Finally, there’s the ethical part. Cryptocurrencies are used for illegal or questionable financial tactics. From black market sales to tax evasion. Even though it is not entirely used for that and has many uses beyond illicit activities, governments around the world are trying to solve the cryptocurrency question, either by legalization or prohibition – but never by letting it stay in a gray area. Most governments are either heavily taxing crypto or outlawing it altogether. Scarcity can shoot the price up – but if nobody can use crypto, it loses all value. Thankfully, it is near impossible to shut down cryptocurrency use due to its design. But if the government makes it so hard to use that everyone moves away from it, the price might go down altogether.

In conclusion, cryptocurrency’s volatile nature is mostly due to its early age. These problems will be probably solved as time goes on and crypto becomes bigger and better. But nobody knows for sure, and only time will tell what happens next.

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