Despite being around for some years, cryptocurrencies are still considered relatively new, and this is widely regarded as one of the fundamental causes of their volatility. All new ideas take time to settle and become accepted, and cryptocurrencies are no exception. Although it is gaining more acceptance by the day as more people buy Bitcoin, this process is still a work in progress.
Cryptocurrencies have piqued the interest of some investors, and many have decided to buy Bitcoin, but the high volatility of pricing has deterred others. The asset class, the market, and investors/speculators are all still getting their bearings; therefore, price discovery is still in its early phases.
Why Cryptocurrencies Are Volatile Despite Increasing Acceptance
Cryptocurrencies have gained global fame (or notoriety) in recent years, but they are not as widely acknowledged as traditional assets like stocks or gold as an asset class. Growing market maturity and acceptance go hand in hand. As a result, when Tesla stated that cryptocurrencies would not be accepted as a means of payment, Bitcoin’s value plummeted. However, the value of Dogecoin increased after Tesla CEO Elon Musk put ‘Doge’ on his Twitter post.
Such influential events or personalities add to the volatility, much as when a well-known investor buys a company’s stock, the price of that stock tends to climb. In addition, trading is currently highly speculative due to a lack of information and rules. Investors make speculative wagers on whether prices will rise or fall, resulting in a quick influx or outflow, resulting in significant volatility, and affecting investors’ decision to Buy Bitcoin. Below are other key reasons for the volatility of cryptocurrencies
The absence of a regulatory body
Unlike other asset classes that are governed or managed by an entity, cryptocurrencies are not controlled by anybody in the traditional sense, as fiat currency, stocks, or bonds are. There is currently no regulatory structure in place for cryptocurrencies, for it varies around the world.
The emotional factor
More investors will comprehend the factors that drive the movement of cryptos as they become more popular and acknowledged. Until then, much of the activity is speculative, with investors buying and selling based on their emotions.
Even long-term investors are interested in cryptos because they believe the asset class will achieve popularity. Tesla’s Musk, for example, revealed that he owns Dogecoin because many of Tesla and SpaceX’s employees do.
Some cryptos, such as Bitcoin, have a finite quantity, unlike fiat cash. Although the quantity of bitcoin is limited to 21 million, demand and supply forces play a role because it is one of the most popular cryptos. For example, Litecoin has an 84 million maximum supply, while Chainlink (Ethereum-based) has a 1 billion maximum supply.
Furthermore, because cryptocurrency is a digital asset, its price is solely determined by supply and demand. Because of the restricted supply, some entities own significant crypto holdings and may thus affect the rise and fall of crypto markets by selling or buying more. This adds to the overall volatility.
The Best Time to Buy Bitcoin
In a world with a population of 7.8 billion people, there are around 120 million cryptocurrency investors. Although adoption is steadily increasing, there is still room for more. The cryptocurrency market is worth less than 2% of the global stock market valuation, which is above $100 trillion. So, for most investors, they can buy Bitcoin at any time.
To put it succinctly, the best time to buy Bitcoin is when you’re ready to do so. You can manage the volatility of your own costs (at least to some extent) and prevent the roller coasters by using the dollar-cost averaging strategy.
If you want to buy Bitcoin, dollar-cost averaging is your best bet. You buy a little quantity at a time over a long period of time using this strategy. Even if you invest at intervals that aren’t all that low, you’ll catch others that are, and it will eventually average out.
The crypto market has ebbs and flows that vary greatly depending on the coin you’re buying. Tokens may also be traded using a different pattern. It will pay to thoroughly research the history of various investment kinds if someone wants to time a crypto buy.
Never invest more money in a cryptocurrency than you can afford to lose. They aren’t assured or secure asset classes, especially due to their volatility. Some people have made a lot of money by making the right buy at the right time, but this is usually due to luck rather than market timing.