An obvious reason for the rapid change in the price of digital currencies can’t be taken away from the fact that the system is still fairly new. There is no doubt that many individuals are yet to come to terms with the cryptocurrency and blockchain phrases.
The first point of consideration is that digital currency prices are not controlled artificially in most cases, some variables cause the changes.
Many have had cause to debates on the abnormal prices from the first periods of their creation. Experts in the financial sector have often said they couldn’t say why cryptocurrencies like Bitcoin have had such rapid changes.
You and I will agree that many who have joined the train of the digital currencies today have done so because of the very sharp changes in price. There is the opportunity of making very big profits.
Likewise, the chance of turning out huge losses is not also far away when trading digital currencies.
However, experts in the digital currency market are confident and calm with the happenings in the digital asset world. They are aware of the underlying factors that may be responsible and are not depending on the sharp prices to make their decisions in transactions.
Here are some of those variables that may be responsible.
Very Low of Liquidity
Unlike in the traditional markets, the digital currency market does not provide as much liquidity. Experts compare the difference between the traditional markets’ liquidity and the digital currency liquidity to be in the range of $89 trillion in favor of the traditional exchange markets.
A wide margin exists in the volume of trade of traditional markets and digital currencies. The conventional foreign exchange markets boast of a whopping 45 trillion dollars compared to the about 15 billion dollar volume of the digital currency trade volume.
Every day, the digital currency market is often busy and active with many new customers joining the fold. The new adopters of the currency drive the price to rise.
One of the determinants of price increase is the increase in demand resulting from the new customers adding to digital currency usage. Some reports had it that over 100, 000 new users of digital currency gets on board in the sector.
Many of these new users are often nervous about the price changes leading them to go with various speculations and buying based on FOMO (fear of missing out). This leads to instability and causes a disturbance in the market.
New markets often experience this issue. In the digital currency market, the possibility is not in doubt. This is particularly possible with centralized exchanges. Internal manipulations can be done by owners of these exchanges.
Artificial manipulation of cryptocurrency prices showing subscribers some slight changes compared to what should normally obtain affects the price of digital currencies.
Other Visible Causes:
1. Checks and Balances:
Digital currencies are open to all. The fact that it is a technology that encourages anonymous use makes it vulnerable to criminally minded people.
The loopholes for profits are there much like you can learn from Bitcoin Loophole. Looking at things from a technical perspective, it doesn’t matter who has developed a blockchain solution. The point is that anyone can get involved without any checks put in place to curtail any fraudulent acts.
There are two ways to it, it can get into the wrong hands and be used to defraud and as to the right hand and be used to better the lives of people globally.
2. Speculative Bubbles:
Speculation is a big driver of the digital currency market and why there are so many rapid changes in cryptocurrencies’ prices. There is a high amount of speculative bubbles finding its way into the market. What goes on in the daily news about the different cryptocurrencies can drive its price immensely.
Many who get to find out about an upcoming Bitcoin bubble are often motivated to spend huge money in a bid to acquire the currency so they don’t miss out from the profit when it eventually comes.
3. Immature Technology:
A major reason worth considering on how the price fluctuation is so rapid in the cryptocurrency market is the very young technology that drives the sector.
Most often, networks become overloaded that it cannot handle the traffic of users, thereby causing delays in as many days before a transaction finally completes. This flaw in technology makes it difficult to cause the needed balance.
A Case Study of Price Changes in Bitcoin
Bitcoin surely leads the digital currency market and no one variable can be tied to the reason why its price fluctuates so quickly.
The impact of government regulations has significantly affected the price instability of Bitcoin to a large extent. This factor seems to be one of the strongest that affects changes in price.
In 2017 when the Bitcoin bubble was the talk everywhere, there were little or no regulations at all in the sector and on the digital currency.
However, many countries beamed their searchlight on the sector and this affects the price in some ways. Governments of different countries come up with legislation and regulatory statements to control the sector.
Regulations can be positive and it can be negative to different people. Some investors will see the good in government interference and help boost their confidence.
Others will, however, be fearful and withdraw their investment for not knowing what might come out of such a regulatory move.
Some examples include:
A price fall in Bitcoin to the tune of about 10% was observed in 2018 when the SEC announced a regulatory move. Online digital asset trading companies were asked to register with the agency.
Another is a whopping 40% drop in the price of Bitcoin and other altcoins in both Korea and China in January 2018. This is as a result of some uncertainties regarding regulations in the countries.
In a different twist and a positive one at that, Japan had been very supportive with its regulations on Bitcoins. The accommodative nature of the government on their regulation has a positive impact on the price growth of the digital currency.
Bitcoin’s Total Supply
One major factor that experts predict will greatly drive the price of Bitcoin is its market cap limit. The maximum supply of Bitcoin is 21 million Bitcoins. This simply translates to a limit of just 21 million of the coins that will ever be mined, after that, nothing more.
Just over 17, 000 have been mined so far, that is above 82% and we are getting closer to the mark of the total.
Working on the principle of demand and supply, as the number of yet to be mined BTC gets more scarce, investors will be encouraged to buy more of the digital currency as it dwindles.
The creator of Litecoin seeing what is likely to occur in the future recommends investors to own at least 1 BTC before investing in other digital currencies. He also emphasized that there are not enough of the coins to reach everyone, not even to the 32.9 million millionaires of the world currently.
General Knowledge of the Public on Digital Currency
If you ask most people around your community about digital currencies or specifically Bitcoin, they will probably tell you they are not proponents of the currency.
Some will tell you the scam about the whole thing. The fact is, there is a misconception and as well lack information to enlighten the general public on the benefits of this newfound monetary system.
All these invariably affect to drive the price downwards when many are not encouraged to buy into the currency.
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