The crypto market is volatile, but there are some essential factors that you can use to understand why it’s so volatile. Understanding these underlying causes can help you better predict price movements and make sound investment decisions.
Crypto is a New Market
As a relatively new market, the cryptocurrency market is still in its infancy. The crypto market is highly speculative, and many investors are new to the space, which translates to high risk. As such, there is little regulation or government oversight that would usually temper investor sentiment in more mature markets.
The crypto market is known for its volatility, but what exactly does that mean?
Volatility refers to the degree of fluctuation in price between two different periods. In other words, volatility is the amount by which a currency’s price moves up or down over a specific period. A highly volatile asset will experience sudden changes in value relative to another currency or asset, whereas a stable one tends not to see these fluctuations. While many people are familiar with this concept regarding stocks and bonds (and even currencies), it can be challenging for newcomers to understand how it applies specifically within the cryptocurrency world.
When it comes to the crypto market volatility, you can’t blame it all on human emotions. That said, human emotions are, in fact, a vital part of the picture, and they can have a significant impact on your portfolio.
To make money in this market, you must understand how your emotions affect your trading decisions. Traders have even created the Crypto Fear and Greed Index, which measures the emotions of the market and attempts to predict when high or low volumes of trade will occur. Keep this in mind when joining online crypto communities where other traders can share their experiences and plans for investment.
Crypto Is Speculative
The crypto market is highly speculative because it’s still a relatively new asset class, and there is no clear way to value them. Because cryptocurrencies are so unique, there aren’t many historical price data points for investors to go off of when making investment decisions—and without those data points, it’s easier for traders to get caught up in the hype around certain coins and lose sight of what makes an investment valuable.
The current market size for cryptocurrencies is also much smaller than other traditional asset classes like stocks or bonds; this means that people who buy into one cryptocurrency tend not only to expect huge returns but also see themselves as part of a group that has discovered something special before anyone else did, such as a new token offering. This excitement can lead some investors into making risky trades based on emotion rather than fact—and when everyone around you seems bullish about a particular coin’s prospects (or bearish), it becomes more challenging to separate yourself from the herd mentality.
Bitcoin is the most liquid cryptocurrency, which means that it has the most volume of both buyers and sellers. Bitcoin’s price is often used as a benchmark to determine the health of a cryptocurrency market. Cryptocurrencies with low levels of liquidity will tend to be more volatile than those with higher levels of liquidity because fewer buyers and sellers are available in those markets, meaning any news or events may have an outsized impact on pricing.
So, when you’re considering trading SOL USD, ETH USD, or any other pair, consider the liquidity behind your coin and your exchange. Liquidity is essential for cashing out of your positions when the time is right. The FTX platform is excellent for traders looking for high liquidity options. FTX is backed by one of the largest liquidity providers in the industry and has a strong liquidity engine that protects the ecosystem from socialized losses and automatically cashes out traders in unsalvageable positions. As the crypto market grows, liquidity providers will become more scarce, and new projects will have to compete for funding to be successful.
News can move the market in either direction. In some cases, the news is generally positive and causes investors to be more optimistic about the future of an asset. This can lead to a surge in demand for that asset and cause prices to rise.
In other cases, the news is negative or ambiguous. It then causes investors to panic and sell their assets to avoid losses or protect themselves from further losses if they think things are going badly.
In short, many factors contributing to market volatility in other markets also apply to cryptocurrencies. However, some unique characteristics of crypto markets can make them even more volatile than traditional markets. You can learn more about crypto volatility by joining an online crypto community with an extensive knowledge base like FTX.