Why is cryptocurrency rate volatile?
Cryptocurrency rate shifts can be generally explained due to the changes in demand and supply. The changes usually depend on a specific economic law. According to this law, there is dependence between a demand, supply (for asset, or any other product), and its price.
Such an answer may appear to be too much generalizing, and good for “digital currencies” application. If you want to understand better the pricing, it is essential to determine reasons affecting the moves of an asset/currency price. Interesting, but there is still a lot of talks about the nature of cryptocurrencies both within and out of crypto-community. Thus, it is up to you to decide what “cryptocurrency” is indeed (including “bitcoin”) – whether it is digital currency, asset, or product.
In course of market analysis, it is important to determine some criteria according to which pricing is shaped. For instance, these factors can be divided into those determining supply, and demand, respectively. Here we will further divide factors affecting price volatility into external, and internal market factors.
Internal market reasons affecting cryptocurrency rate changes
The internal market reasons
of cryptocurrencies’ rates changes combine factors influencing internal market only. These are:
1. Traders, in particular, most active ones affect pricing.
It is generally accepted that the higher cryptocurrency capitalization is, the less significant major traders influence is, and vice versa. Bitcoin typically illustrates the case of highly capitalized cryptocurrency. If we multiply bitcoin by its overall number, the total amount will exceed $190 bln. That is why bitcoin price movements depend majorly on the general market situation. Major traders (“bulls”, who are likely to increase pricing, and “bears”, who are likely to decrease pricing) are trying to manage price fluctuations with the help of market tools under appropriate market conditions. The actions of the “middle” traders depend on the readiness of the last to buy up the assets, sell them, or wait till the appropriate price. It also depends on how the majority estimates the general price tendencies for a specific cryptocurrency (including overbought, and trend reversal possibilities).
The more middle traders influence cryptocurrency rate online, namely bitcoin price, the more effective the rate tendency forecasting with the help of technical analysis
and predictive analysis is. The last method is based on the analysis of the platform previous, and current activity. That is how bitcoin rate was changing during last year, month, or week, and how much does bitcoin cost today
2. The crossed influence between different cryptocurrencies’ rates is also possible.
Thus, in course of bitcoin price growth, other cryptos (altcoins) drop in fiat equivalent (USD, EUR, RUB, and so forth.), and cheapens even more in relation to bitcoin. It happens due to the fact that in course of bitcoin price growth, altcoins’ funds move to bitcoin. In this case, altcoins with strong support only can hold its positions. The reverse, and inverse types of influence are also possible. For instance, funds outflow to the rapidly increasing altcoins from other altcoins, or bitcoin. This cannot but decreases altcoins’ rate, or bitcoin price.
That is why it is not enough analyzing situation over cryptocurrency that you are interested in only. It is recommended to monitor other cryptocurrencies’ situations, when something is happening, or is about to happen. It is still too difficult to monitor every coin online rates. Furthermore, it is not needed. It would be enough for you to follow the latest key news, and changes on bitcoin, and altcoins possessing important capitalization.
Price volatility external reasons
The external reasons
include events and tendencies happening outside the cryptocurrency market. However, the following factors are quite important:
1. Thus, the demand for bitcoin is growing while national currencies are experiencing devaluation. The same happens under monetary and taxation systems control tightening, and economic crisis on both local and global levels spread.
Year 2017 was rich on such events. So, it is not surprising that bitcoin rate has increased much in a year, making its price in 30-50 times greater (while bitcoin price has grown by ten times). It is generally accepted that a reliable, and positive trend is most typical for bitcoin. That is why bitcoin investment is thought to be the least risky. However, though a price for an altcoin is less than a price for a bitcoin, the most successful altcoins still have a potential to rise in price.
You can evaluate cryptocurrencies growth rates applying EXMO graphs, and find out what a current cryptocurrency rate
is, namely how much bitcoin costs for today.
2. Economic situation, and some of the passed legislations cannot but induce the demand for cryptocurrencies in a long-run perspective. Directly, or indirectly bitcoin-related news do not exercise any significant influence on a cryptocurrency rate. However, it all depends on the capitalization level of that or that one crypto. The following news can boost the demand for cryptos:
a) Important information on technical update of the crypto-software. For instance, SegWit update managed on Litecoin in Spring 2017. LTC price increased majorly due to SegWit in the first month and a half after its successful completion. Furthermore, the information about SegWit completion initiated the further cryptocurrency price increase. After the announcement of the successful bitcoin SegWit activation, bitcoin price doubled in the first weeks of August. The current bitcoin price is more times greater than the middle August one.
b) Positive evaluations of the role, and efficiency of cryptocurrencies (in particular, bitcoin) expressed by political and economic authorities, or mass media.
c) Global economic news spread (we have already discussed this point above) can enhance bitcoin price under condition this news report the negative sides of world economy.
d) News about adding cryptocurrencies including futures to the ordinary stock exchanges. Such pieces of news are favorable in relation to the bitcoin rate increase perspectives.
At the same time, there is news affecting negatively cryptocurrencies rates. These are the pitfalls of the mechanisms describing the work of some cryptos, breaks, security problems on cryptocurrency platforms, information on governmental regulations of crypto-market.
All in all, it is recommended that a trader monitor the news to understand the potential impact of the last on cryptocurrencies rates. It is also important to understand that some news is created artificially to affect crypto-rates. The fake news is also produced to manipulate the prices. That is why the news have to be evaluated with caution. Finally, the news is to be enforced with links to a reliable source.
3. Political events can also maximize the demand for bitcoin, and other cryptos as well. Let’s have a look at the UK Brexit case. After Brexit supporter win by referendum, the demand for bitcoin increased much. Thus, it can be suggested that the European integration opponents coming to power in any of the EU countries can boost demand for bitcoin.
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