In today’s world, a person can clearly define the functions and applications of technology. Almost everything is today backed with smart features or any other technological aspect. It seems that technology has marked its importance in every sector and industry.
Apart from innovation, technology has also introduced certain products and systems. One of the best results of technology is cryptocurrency. These digital currencies have revolutionized the finance system of the world.
There are various beneficial features of these currencies like being secure, faster, convenient, etc. However, there are various downsides to this mode of currency transaction. There are various platforms like AteBits bringing various details about crypto, like price change, the introduction of new crypto, etc. One of the most significant demerits of these currencies is the price fluctuations.
Many people refrain from investing in these currencies like Bitcoin, Ethereum, Dogecoin, etc., due to variable prices on different days. The price of these coins can go up and down frequently. The high volatility causes a major problem for crypto traders. As a result, investors involve themselves in the prediction process. The following section outlines the most common reasons for these frequent fluctuations.
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Why Cryptocurrencies Are Volatile And Price Fluctuations Occur Frequently
There are various known and unknown reasons for the price fluctuations of various cryptocurrencies. Many people have ascertained different models and tactics to combat this high volatility. The following points highlight some of these reasons.
Market Forces Of Demand And Supply
Demand and supply of any product are very important to determine its prices. When an asset has a regulating or governing body, the demand and supply of the asset will not induce high fluctuations in it.
But when there is no controlling organization for regulating the prices or setting a minimum price for an asset, it will lead to high fluctuations in the value of the asset. The same goes for the prices of cryptocurrencies.
The price of crypto is left to investors and traders. In other words, there is no nodal organization that sets a maximum or minimum limit for the market price of the asset. As a result, when there is a slight change in the demand for a particular coin, there will be a high rise in the prices.
On the other hand, low demand and high supply will induce the prices to fall. In this way, the market forces are the sole determiners of the crypto price. This upward and downward movement can be caused by outside elements like media, influencers, etc.
Production Cost Of Crypto
Most crypto enthusiasts know that crypto mining goes through a complex process. The mining generates new digital currencies. This technique involves a supercomputer working at high speed to check the next transaction or block on the blockchain.
The miners work in a competitive space where a miner competes with various other miners to solve complex mathematical problems to get the reward of completing the problem the fastest. These rewards are in the form of the same cryptocurrencies they are mining.
In this verification process and transactions, the supercomputers need a high degree of accuracy and power. As a result, the participants of the process purchase heavy equipment and electricity.
When a popular currency is mined like Ethereum or Bitcoin, more energy is required. The difficulty also rises with this. As a result, the cost of mining increases due to more speedy transactions. In this way, the price of these currencies will rise abruptly. On the other hand, the cryptocurrencies with less popularity will have low prices initially, aligning with the demand and supply.
A beginner or non-specialist will hardly remember more than four to five cryptocurrencies. The popular ones like Ethereum, Bitcoin, Dogecoin, etc., will have generally high prices. But, there are over a thousand cryptocurrencies being mined in the world.
A person can launch new cryptocurrencies easily due to limited barriers to entry. However, an established and viable crypto will mean setting up an impressive user network. If the new competitor builds such a network that sets a tough competition for existing tokens like Bitcoin, it will cause the price of Bitcoin to drop and the new currency to rise. As a result, there is a regular up and down in prices when competitors pose a challenge.
Law And Regulation
Legal requirements also play a crucial role in determining crypto prices. They lead to price fluctuations in a growing market. Market regulations and legal proceedings will result in people’s decision to take long (buy) or short (sell) positions in the market.
When the legal requirements are encouraging and carry a positive influence, it will lead to people buying and investing more in cryptocurrencies. On the other hand, people will lose interest in digital currencies when the government is unsupportive (like raising taxes, etc.). As a result, the demand and supply will be affected, and the prices will tend to fluctuate abnormally.
One of the common reasons many people are aware of is the media’s influence on investment decisions. Tweets and social media have caused major havoc in the pricing structure of cryptocurrencies.
When people see an influencer or personalities investing in a particular crypto, they start investing in it. There are hundreds and thousands of people who start investing. Even the slightest increase can cause an increase or decrease in the price of cryptocurrencies. For example, a tweet by Elon Musk caused a currency to bring up its prices.
As the technological era progresses, the rise in crypto traders has broken into the headlines. There are many advantages and loopholes being discovered as more and more people are gaining interest in them.
However, price fluctuations in these currencies have been the most debatable point. Price movement can either favor a person or go against them. People should predict these changes in advance to get momentum in their trade and portfolio.