Home Finance 8 Reasons Why Are Digital Currencies So Volatile

8 Reasons Why Are Digital Currencies So Volatile

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As compared to other investment options, the cryptocurrency market is quite volatile. Every year, we see significant price fluctuation in different digital assets. If anyone is becoming rich overnight, then another person is losing all of his money. But the number of investors keeps on adding with a single aim of making money.

But do you know why this crypto industry is highly volatile and how it affects people investing in virtual assets? Undoubtedly, there are plenty of ways through which one can make money by using cryptocurrencies. It involves techniques like buy and hold, mining, day trading, etc.

If you want to produce Bitcoin or other digital currencies by GPU mining, you must visit https://topiacoin.io/. It is necessary to understand the volatile nature of the crypto market. You must know why the price of digital assets fluctuates. In the following write-up, we will discuss various reasons why virtual currencies are volatile.

1. Utility

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It is necessary to know the number of people using their cryptocurrency to make payments or buy commodities. It works like fiat money, and you can buy any product or service with ease. But such a purpose can affect the price. Many people do not have an idea about it. Let us understand by an example.

If more people spend their virtual assets to purchase goods than holding them, the price will go up. Many online stores know about this fact, and they want the value of coins to grow. It will be beneficial for them in the future because the price will hike.

2. Scarcity

There is a protocol behind the mining process, i.e., 21 million. It is pre-determined that the number of Bitcoins needs to be mined every day. It means that if more people join the crypto industry, virtual assets will become scarce. The price will hike, and it will be hard to afford it.

There is a burning mechanism behind some coins. The value is destroyed in supply to increase its value. It is the primary reason that makes digital currencies volatile. Therefore, it is crucial to know the right time when you should join the crypto industry.

3. Whales

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Many people buy cryptocurrencies when they find the price low. They keep it on hold in their digital wallets or accounts. But if they keep them on hold for a long time, the coins begin selling, and it can lower the price.

Such accounts are known as whales because it keeps massive holdings, and it can influence the market. It is necessary to sell your assets stored in the digital wallet whenever you see a profit. You must analyze the market and make the deal at the right time.

4. Emerging or Developing Industry

The crypto industry is highly volatile because it is quite developing. The industry size is relatively small, and hence, it affects the price. If a large group sells its virtual currency, then it can lower the cost. Due to the developing status of the virtual asset market, one can get plenty of opportunities for risking and making money.

Many projects are in the queue to release in the industry. But none of them is completed, and hence, it makes the currency volatile. Whenever you enter an emerging industry, you can talk about the product and sell them to many individuals.

5. Purely Virtual Cryptocurrencies

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Undoubtedly, cryptocurrencies are completely virtual assets. No other commodities, as well as currencies, can back it up. The price fluctuation is dependent on the supply as well as the demand of these virtual assets. Sometimes, the supply is fixed, and hence, the price will depend on the people who want to purchase it.

You cannot consider any physical asset to return to all the virtual assets and use it as fiat money. If people believe that the cost of virtual currencies is constant and it will never change, they will begin selling them. In this way, the price will reduce, and hence, many people will get convinced to sell their assets. There are chances that such a condition may increase the rate and cause inflation.

6. Technology is Still Developing

Crypto technology, like blockchain, is in a developing state. Anything can happen in the crypto industry, and price fluctuation is quite common. With time, the nature of the crypto market is becoming more volatile. Many people are joining the network, and they are becoming part of significant exchange platforms.

Due to congestion in the network, transaction costs are increasing. There is an enhancing effect in the industry’s pivotal developments. Nowadays, many new cryptocurrencies are coming into existence, and hence, they are competing well and sharing the common market.

7. Speculation

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It is a common reason for the volatile nature of virtual currencies. Investors bet on improvising the cost of cryptocurrencies by purchasing and selling their virtual assets. If you predict the price, then you can easily make more money.

The random betting and winning the rewards depend on your luck. Cryptocurrency belongs to a choppy market, and hence, speculation is quite common among investors.

8. Media Stories

The market of cryptocurrency is relatively small, and therefore, speculation is quite common here. People update themselves by watching media headlines or exploring social platforms. Everyone guesses the price of digital assets after analyzing and comparing the market.

Whosoever does the guessing quickly makes money, and the slowest one loses his bet. It affects the price of cryptocurrencies. Many online stores take advantage of this thing by providing an option of paying the amount in BTC or virtual currency. People believe headlines, and they buy commodities in the exchange of digital assets.

The Bottom Line

The digital asset market is highly volatile. You must go through all the mentioned reasons to know the industry status. Before investing your money in these assets, make sure that you are taking a risk.

You need to be prepared for the profit and loss at the same time. It is necessary not to avoid trying anything new. Explore the market nature and invest your money in digital assets with no or fewer risks.