Over the years, the cryptocurrency market has developed a reputation for being volatile and unpredictable. However, even though crypto valuations can rise and fall in short periods of time, investor confidence in the market as a whole has never wavered. This is perhaps most evident by the fact that the market has an astounding total value of over $230 billion. In the following sections of this article, let’s understand the primary factors that influence volatility in the crypto market and how you can minimize your portfolio’s exposure to its harmful effects in the future.
2017 was among the cryptocurrency market’s most turbulent and volatile years in recent history. Bitcoin, the largest digital currency by market cap, started the year with a valuation of $1,000, only to enter 2018 with a price of approximately $14,000. Other cryptocurrencies have experienced similar price swings as well. Ethereum, for instance, has appreciated 54,519% since its initial coin offering (ICO) in July 2014. Early investors of Basic Attention Token (BAT), on the other hand, have witnessed a more modest 801% profit over the past three years.
Volatility in traditional markets has historically been measured by the CBOE Volatility Index, commonly referred to by its ticker symbol VIX. The index represents the market’s expectation of volatility over the next 30 days by considering the price movements of the S&P 500. While the crypto market did not have a similar metric for several years, BitPremier and Satochi.co recently began offering a similar index that estimates Bitcoin volatility over a 30, 60, or 120-day time frame.
Why the Volatility
Even though millions of individuals around the world have entered the crypto market in some capacity over the past few years, a sizable chunk of the population has never used a digital currency. Whether one considers Bitcoin and the like to be a robust store of wealth, an investment tool, or a decentralized revolution, there are still many that need to be convinced of its advantages and potential. As more and more people become aware of digital currencies over time, demand for a limited supply of tokens will naturally increase as well.
An increase in demand always corresponds to positive price movement for the crypto market. However, demand can also fall when awareness slows down, leading to periods of price dormancy.
Like any other market, cryptocurrency has its fair share of good and bad news throughout the year. Positive news, such as support from a Fortune 500 company or a technological breakthrough, always propels crypto prices upwards, while negative stories do the opposite. Security breaches at high profile crypto exchanges and malicious actors, on the other hand, can drive down the value of any cryptocurrency. As the market matures and diversifies though, such isolated events will have a reduced impact on prices.
Growth and Contraction of Use-cases
A cryptocurrency’s usability and value hinges on retailer adoption, both online and offline. Today, services like Coinmap and 99Bitcoins offer a list of all merchants that accept crypto as a payment method. Two years ago, however, volatility and infrequent usage prompted a handful of storefronts to withdraw support for crypto-based payments. Steam, a digital video games marketplace, said that accepting Bitcoin payments had become untenable in light of high fees and price fluctuation.
Turbulent fiat currencies can also motivate investors to move their wealth from traditional assets into digital alternatives like Bitcoin. The unpredictable nature of the Chinese yuan because of the US-China trade war, for instance, has inched Bitcoin prices upwards since the start of 2019. As a result, crypto has been labeled ‘Digital Gold’ by many in recent times.
How to Keep up With Volatility
As with any other financial instrument, diversification is the key. Keeping all your money in one cryptocurrency is generally considered to be bad practice, and is comparable to holding only one type of stock in an equity market. Besides that, having a long-term outlook on your crypto portfolio is generally recommended as the problem of day-to-day liquidity diminishes greatly.
With over 5,000 cryptocurrencies on the market today, choosing the right one depends heavily on your risk appetite and investment goals. Given that it is a relatively young asset class, the process of researching and shortlisting cryptocurrencies may require more due diligence than say, precious metals, commodities, or stocks. To alleviate this problem, Alluva is building the world’s largest analyst platform that offers an unprecedented level of transparency in emerging markets such as crypto. Alluva is a free web app that rewards users for accurately rating the price potential of various assets without any upfront token purchase or investment.
To begin earning rewards, make your first prediction on Alluva by signing up for an account here. For more of our coverage on the crypto market, stay tuned to our Medium account here and blog here. Get in touch with our development team on Telegram and learn about the latest Alluva-related developments on Twitter.
Why Bitcoin Has a Volatile Value and How to Keep Up with It was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.