Why are cryptocurrencies so volatile and what determines their prices?

Cryptocurrencies have been making front-page news once again, with Bitcoin leading the pack and consistently breaking resistance lines all over the charts. Yes, experienced investors and market observants are still hesitant to enter. Why, you may ask, should anyone wait to buy Bitcoin when 97% of Bitcoin addresses are in profit?

The crypto markets are still in their infancy, which makes them a lot more volatile than other investment options. With a market cap that is barely exceeding 400 billion, this new market still needs to prove that it is able to survive. And while most of us know its potential, others need proof.

So, what exactly makes crypto volatile, and are these sudden price wicks important for a coin’s long term potential? In this article, we will help you understand how a coin’s price is determined and help you get a better sense of timing the market.

Why are cryptocurrencies so volatile and what determines their price?

The volatility of the crypto markets can be blamed on the following reasons:

  • A small number of investors control the majority of a given cryptocurrency. These are usually called “whales” and are more often than not part of the project’s founding team or large investors. This is also why most people prefer to invest in Bitcoin over other coins and tokens.
  • Sentiment > Fundamentals. In the crypto markets, the way people feel about a certain coin at a given point in time is much more important than the project’s fundamentals. And this feeling can change in an instant, as it is heavily influenced by news, mainstream media, influencers, and general market outlook. This is also why 1 week in the crypto markets seems like a year in the stock market.
  • There is risk and a lack of trust. Apart from Bitcoin and some of the biggest cryptocurrencies, most of the coins people buy are purely for short-term profit. After all the chaos observed in the ICO markets in 2017, investors are now more careful when investing in new cryptocurrencies with smaller market caps. Due to entering and exiting positions at a rapid pace, and because of the limited liquidity, the price of a coin remains unstable.
  • It’s a demand-only market. Even though cryptocurrencies have, over the years, developed different methods to give the impression of increased scarcity, the price of a coin is still determined solely by investor demand. The Bitcoin halving was the first attempt to gradually increase the scarcity of BTC. This was followed by coin burns, token lockups, and different coin “freezing” programs that limit the supply in the market. To this day, it has not made a significant difference.

Timing the market – Buying the dips

Most successful traders know how to use the volatility of cryptos to their advantage, and get paid for each sudden move that happens in the market. The most common terminology that refers to this process is known as “buying the dip” and simply refers to the process of buying a coin at a local low.

Here are a few tips on how you can time the markets:

  • Learn the basics of technical analysis – Analysing the markets through bar charts and price indicators is a great way to discover great entry points and make profits from the volatility of the market. There are many things you need to learn if you’re not familiar with trading, but a great point to start is CryptoCred’s Medium channel.
  • Set clear entry and exit goals – Avoid making emotion-based decisions and set buying and selling targets before-hand. The sentiment of the market will make you want to change your opinion, but the best traders are those who stick to the plan, even if it doesn’t always work in their favor.
  • Avoid leverage trading – This advice may sound a bit generalized but is very important. Leveraged trading is the type of trading where you can take a short-term loan and trade with a margin. It may seem like a good idea to trade with a multiplier when thinking about the potential profits, but it is one of the riskiest forms of trading available, and one that has cost many experienced traders a fortune.
  • Invest a small part of your trading portfolio in each trade – The market can always go sideways, no matter how well-versed you think you are. Most traders enter trades with 1%-5% of their trading portfolio and only drive the trade for a small, predetermined percentage. Adding more than that in a single trade is asking for trouble.

Wrapping up

You should now have a better idea of the factors that contribute to a coin’s price, and why cryptocurrencies are so much more volatile than other investment options. Now, continue your research and make sure you invest responsibly.

About Author

Jake Simmons has been a crypto enthusiast since 2016, and since hearing about Bitcoin and blockchain technology, he's been involved with the subject every day. Beyond cryptocurrencies, Jake studied computer science and worked for 2 years for a startup in the blockchain sector. At CNF he is responsible for technical issues. His goal is to make the world aware of cryptocurrencies in a simple and understandable way.

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