Metal University Educational Series
One of the most frequently asked questions we receive from our users is why the value of their cryptocurrencies can change so rapidly – and why their prices change at all in the first place. Understanding what it is about cryptocurrency that allows prices to frequently change involves understanding some fundamentals about economics in general, but we’ll break it down into a quick refresher on cryptocurrency “volatility.”
So what is it about cryptocurrency that allows prices to swing often, and sometimes by large percentages? Let’s explore this concept using Bitcoin (BTC) as an example.
A New Kind of Investment
Unlike bonds, precious metals, real estate, or stocks, cryptocurrency is one of the newest options for investors. Cryptocurrency was invented about a decade ago, although the idea for crypto existed long before that. However, widespread investing in cryptocurrency has only just begun. As a result, there are fewer norms and habits in this market, which gives investors few examples to follow and fewer ideas on what to expect when prices change. BTC is the oldest cryptocurrency for investors to choose, so fluctuations in BTC’s price are often due to newcomers not knowing what to expect.
When a story breaks about anything from trade tariffs to job reports, markets move in reaction to the news. We see this happen often with stocks; as we learn about trade tensions or quarterly reports, the overall performance of the Dow Jones Industrial Average or the S&P 500 can rise or fall quickly. Cryptocurrencies behave no different in the markets and are sometimes seen as an attractive alternative to traditional stocks whenever economic news becomes too murky or chaotic. The impact that media stories can have is amplified when looking at particular coins, too. When BTC makes the news by announcing new updates and technical achievements, the price of Bitcoin might change quickly. This can be due to new market buyers learning about an exciting new option, or existing market buyers and sellers gaining more (or less) confidence in their choice.
Compared to traditional stocks or bonds, there are relatively few people buying and selling cryptocurrency at any one time. The crypto market still sees a high daily trading volume, but its relative newness and lack of regulatory clarity has kept large investment firms and mutual funds from joining for some time now. As clearer regulations are passed and the crypto market matures, we expect to see larger market buyers participating and trading crypto as well. This is precisely why our team at Metal has been assisting Congress with understanding what cryptocurrency/blockchain is and what regulations are needed, while simultaneously partnering with other organizations and industry leaders. We want to see the crypto market mature and more people join in, and we’re working hard to make that happen.
The bottom line: cryptocurrency is a new, exciting industry with a smaller number of buyers than older, more traditional options. As a result, media buzz and regulatory uncertainty can cause prices to swing daily. However, as the market matures and more buyers enter the field, prices will likely become less volatile and more stable.
Do you have other questions about BTC, ETH, MTL or cryptocurrency in general? Be sure to follow us on social media and ask us a question! We’d love to clear things up for you, and your questions just might find its way into our next quick lesson.