There are a few reasons why it fluctuates, but they all boil down to the same thing: Supply and Demand, Regulations, Belief in utility, Lack of use cases, and a plethora of other factors. Fortunately, these factors are not complicated. But understanding them is crucial if you want to profit in this volatile industry.
Supply And Demand
It’s because most cryptocurrencies’ total supply is limited, based on the law of supply and demand. When demand outstrips supply, the price increases, and a coin’s value drops. If the opposite happens, the coin’s price goes down. Ultimately, supply and demand determine the price of any coin, and this dynamic affects the price of cryptocurrencies.
The value of a cryptocurrency is similar to that of a fiat currency. This means that its value comes from the central government’s value statement and parties transacting. While the value of fiat currencies is tied to government regulation, the market is still in a very early stage, and there are few logical applications. The industry’s newness and heightened investor experiments contribute to the market’s high volatility.
While cryptocurrency is purely digital and exists only in code in a blockchain, some people think it shouldn’t be worth anything. However, this is a fallacy since cryptocurrencies are tradable assets governed by market demand and supply. This is why prices rise and fall daily, and supply and demand in the crypto market fluctuate. A small amount of cryptocurrency is worth only a few dollars, while the price of a large portion of the market’s currency is unattainable.
Bitcoin, for example, has been fluctuating because of uncertainty surrounding it. The cryptocurrency doesn’t have widespread acceptance as a store of value and is subject to unethical trading practices on cryptocurrency exchanges. This volatility has generated many critics and non-believers, but many bitcoin traders don’t mind it. Even some public figures are changing their minds about bitcoin, and rumors continue to surface in the market.
Regulations
The cryptocurrency market is highly volatile. Many investors bet on its value to make a profit. This causes a surge in incoming money and a sudden drop in outgoing funds, creating a constant cycle of volatility.
Many critics believe that the price of bitcoin is falling because of an over-inflated psychological effect. Cryptocurrency prices have an outsized psychological effect compared to other assets, significantly when the interest rate rises. This means that a new cryptocurrency can have a significant impact on the value of another asset. Because of this, it can lead to a collapse in its price. In other words, when the value of Bitcoin is falling, the price of all other assets also falls.
Despite the high price of cryptocurrencies, most Americans own at least one. That’s twice the percentage of Americans who owned them just a year ago. Large banks and hedge funds poured money into the market and used borrowed money to increase their bets. Nevertheless, the crypto market has been volatile, especially for investors who bought during the price surges last year. Aside from a high-frequency trading system, cryptocurrency prices are highly dependent on consumer and price trends.
Another factor that contributes to the volatility is the Lack of liquidity. While cryptocurrency prices are often volatile, their overall cost will increase with widespread use. If regulations restrict the circulation of cryptocurrency, demand will fall. In such cases, the market may see many sellers, making it hard to predict prices. And, of course, the possibility of regulation is another reason for the volatility of cryptocurrencies.
Lack Of Use Case
One argument for the Lack of a use case for cryptocurrency is that it is not yet mainstream. According to economist Alex de Vries, who runs the website Digiconomist, cryptocurrencies consume a lot of energy. This is a concern that local leaders should consider when marketing the currency. Since communities of color have historically used expensive, risky, and complicated financial services, they should consider cryptocurrencies as a solution.
Many factors affect the price of cryptocurrencies, including Government policies and Tax stances. The supply of cryptocurrencies is limited, which influences the price of cryptocurrencies. In this article, we’ll explore some of the main factors that affect the price of cryptocurrencies. You’ll learn how governmental views and the Lack of regulations affect the price of cryptocurrencies.
Bitcoin’s Price Fluctuates On Speculation
The primary reason Bitcoin’s price fluctuates daily is the digital currency’s speculation. It is still in the early stages of development and is subject to many rumors. Some investors are skeptical of its legality, while others are more open to the concept. Regardless of the rumors, the commoner is becoming aware of cryptocurrency and thinking about investing. These factors all play a role in why the price of bitcoin fluctuates.
Read More: What Affects the Crypto Market?
Government Views
How do Government views of cryptocurrency affect Bitcoin’s price? Many analysts point to the government’s stance on digital currencies and the Lack of regulation surrounding the industry as two reasons for its volatility. In El Salvador, for example, over 70 percent of the population does not have a bank account, and half of those people do not use the Internet, making Bitcoin transactions extremely difficult. Other countries have created creative regulations around crypto, such as India’s recent proposal to tax transfers of cryptocurrencies at 30%. The effect of these tax increases on investors is that it reduces their net gains and, therefore, the overall attractiveness of buying crypto assets.
Tax Stance
The recent IRS notice on virtual currencies, including Bitcoin, is an example of how the agency incorrectly categorizes the currency. The notice misrepresents the currency as an investment and fails to recognize its primary use as a form of wages and transactions. As a result, the tax treatment and compliance requirements are inappropriate and do not apply to the primary use of virtual currencies. The IRS’s decision may have an impact on the price of Bitcoin.
Supply Of Cryptocurrencies Is Limited
The supply of cryptocurrencies is limited, and the demand for each asset is increasing. A digital currency is like a gold standard, and the supply of bitcoin will decrease over time. The demand for a particular cryptocurrency will depend on various factors, including its demand and design. In theory, the greater the demand, the higher the price.
Volatility
The term “volatility” refers to the rate of change in the price of a security. Traders and investors use it to determine the risk associated with price changes. The standard deviation and beta of a security help determine its volatility. Standard deviation measures how dispersed the price of a security is, and beta determines how volatile security is about the market as a whole.
