The year hasn't started well for cryptocurrencies. Since the beginning of the year, Bitcoin (BTC) has lost approximately 20% in value, while Ethereum (ETH) and Binance Coin (BNB) have lost nearly 30% and 25%, respectively.
These are the three most valuable cryptocurrencies currently in circulation, measured by market capitalization, excluding the dollar-pegged stablecoin Tether (USDT). It isn't the first time that crypto has taken a significant drop.
Cryptocurrencies experienced a major collapse from mid-May to mid-July 2021, with Bitcoin falling more than 45 percent. Many investors are still interested in cryptocurrencies, despite the volatility.
Vice president of strategy at Early Investing Vin Narayanan believes that "crypto adoption will boost stability." Cryptocurrency collapses may happen at any time, so investors should be aware of what to look out for in the meantime.
In this post, you'll learn about the causes of the cryptocurrency market's collapse and why we'll also discuss why the cryptocurrency market is so volatile.
Beginner's Guide: Why are Cryptocurrencies so Volatile?
In contrast to established currencies like the Euro and British Pound, Cryptocurrencies see substantial daily swings, often altering by as much as 5-10 percent. Traders may make a lot of money if they correctly time their purchases and sales of currencies.
Occasionally, a catalytic event can cause 50% or more price swings and 200-300 percent or more in extreme circumstances. Why is this asset more volatile than any other liquid asset? To explain why cryptocurrencies are so volatile, you must consider several factors:
There is No Intrinsic Value
Most cryptocurrencies don't have a product to sell, generate income, or hire employees. In general, they don't pay dividends, and only a small percentage of the currency's entire value is invested in its development.
As a result, it is incredibly difficult to estimate its worth. It's difficult to tell if it is fundamentally overbought or oversold. If it's pricey, is it worth it?
We can only rely on market mood, often determined by the media, which generates money by attracting viewers.
Volatility in the cryptocurrency market might be attributed to the absence of regulation in the industry. Market manipulation is possible due to the laxity of the regulations in place.
It is unlawful to place bogus orders in a controlled market like the foreign exchange, but this is how it is frequently done. An incorrect portrayal of market behavior might lead to an increase in volatility due to these misleading orders.
The Supply and Demand
Cryptocurrency's price swings can also be attributed to the fundamental laws of supply and demand. When the demand for a certain asset exceeds the supply, the price will almost certainly rise.
During the Christmas season of 2017, we witnessed this in action with Bitcoin. Traders' profits fueled a surge in demand for Bitcoin throughout the year, and supply was unable to keep up with demand, leading to a price of about $20,000.
There is no Institutional Capital
Many notable venture capitalists, hedge funds, and high-net-worth individuals support and invest in cryptocurrencies.
However, the vast majority of institutional money is still sitting on the sidelines in this sector. The prospect of a Mutual Fund or Bitcoin ETF, which is expected to provide much-needed institutional activity to the cryptocurrency markets, has yet seen little to no action.
Size of the Market
Only a decade old, the bitcoin sector is still in its infancy. The bitcoin market is presently valued at $250 billion. Even if this is a significant sum, it pales compared to the foreign currency market's $5T daily turnover.
Because of this, the foreign currency market can maintain its stability even amid major market moves. However, the cryptocurrency market is a different story. Whales (large traders with a lot of currency) might use this to move the market by transacting large sums of money.
Why is the Market of Cryptocurrencies Constantly Crashing?
Increasing inflation has prompted central banks to tighten monetary policy, contributing to the volatility of cryptocurrency markets.
The latest slump earlier this year was exacerbated by China's tightening of restrictions on Bitcoin mining. Concerns about the omicron variant's impact on global economic growth have also sparked a risk aversion among investors.
Compared to their record highs in November, global equities are down almost 4%, while safe-haven assets like Treasuries are up. In addition, the recent rise in interest rates to combat inflation has helped the dollar gain ground versus other stable currencies and cryptocurrencies.
In addition, Twitter's chief financial officer, Ned Segal, voiced disapproval of cryptocurrencies in a way that might have affected the market.
Investing in crypto-assets "doesn't make sense" at this time, he added. People tend to sell their crypto assets when they hit record highs, which happened at the end of November as part of the cryptocurrency's natural cycle.
What Caused the Drop of Cryptocurrencies in Jan 2022?
In the crypto ecosystem, there are several factors at play. In the first place, there is regulatory ambiguity about crypto tokens and stablecoins, including whether they are securities. As Michael Saylor described it in an interview, there is a lot of leverage offshore.
Leverage is available on several crypto exchanges at up to 20x, and many coins are cross-collateralized. Because of this, you may acquire even more leverage than 20x between them and the DeFi exchanges.
Derivatives like futures and options are increasingly popular with investors, utilizing loans to fund their purchases. In this approach, miners may protect themselves against potential price declines in the cryptocurrency they're mining by hedging their bets.
Leverage has a direct role in the short-term volatility of crypto, which might lead to the liquidation of long-term investments. As crypto prices continue to plummet and investors begin to liquidate their positions, prices might fall much more.
In a market like crypto, where there isn't much liquidity, it generates a cycle similar to what happened in the stock market in 2008. These are the main causes of cryptocurrency's volatility in the market.
As Michael Saylor puts it, there is a love-hate relationship between bitcoin HODLers and the crypto ecosystem because the crypto market is virtually engineered to generate volatility.
For many Bitcoin HODLers, the long-term goal is to hang onto their digital currency for decades, if not centuries. However, fast money hedge funds may take an entirely different approach to crypto.
You've got two very distinct investing approaches when it comes to Bitcoin and the cryptocurrency market in general.
For better or worse, the world's most volatile quick money market is known as crypto, and the world's least hazardous asset presumably to keep for the next century is now connected.
Investors need to assess how long they plan to store digital assets like Bitcoin and whether or not they can withstand market downturns like those in early 2022.
You should ask yourself why you're considering a bitcoin investment before making any further decisions. A wide variety of financial options exist at this time. Do you care about cryptocurrencies only because they're popular right now?
There may be other reasons to invest in a certain digital token, like a desire to diversify one's portfolio. Different investors have different investment objectives, and investigating the cryptocurrency market may make more sense for some people than for others.
- Get a Grip on the Market
- Become a Member of a Cryptocurrency Community Online
- The White Papers on Cryptocurrency are worth reading.
- The Importance of Timing
Cryptocurrency is a hot topic right now. There is no denying that Bitcoin is soaring. For inexperienced investors, the inherent volatility of individual cryptocurrencies makes it appear extremely hazardous to put money into the industry.
These crypto ETFs are a great resource. Some of the greatest ETFs for investors are listed here:
This Crypto ETP is tracking the price of Ethereum. Total assets under management (AUM) for the 21 Shares Ethereum ETP are EUR 336 million, with an expense ratio of 1.49 percent per annum.
In the short time since it was introduced in March of this year, the 21Shares Ethereum ETP has grown in popularity and outperformed investors' expectations. A year after its launch, the Crypto ETF's returns have grown by 907.89 percent, including dividends.
By duplicating the traditional ETP structure, 21Shares hopes to simplify bitcoin investing. It has also brought in five new executives from Europe and the Middle East to focus on those markets.
VanEck Vectors ETN is a new crypto ETF, but it's receiving a lot of attention in the market. The ETF monitors the price of Ethereum and is backed by real assets.
The crypto ETF's fund has grown to 78 million Euros since its start in March 2021. There is a good price history for the VanEck Vectors Ethereum ETN, and the charts suggest a steady rise in value.
CoinsShares February 2021 was the date that the first physical Ethereum was released. The ETF monitors the price of Ethereum and is backed by real assets. Share prices were initially lower than expected.
There has been a considerable increase in crypto ETF performance since mid-July 2021, with six-month returns exceeding 90% on several occasions.
WisdomTree Bitcoin monitors the Bitcoin market. This crypto ETF provides physical security with a total expense ratio of 0.95 percent p.a. WisdomTree Bitcoin has amassed EUR 271 million since its launch in November 2019.
In July 2021, the Crypto ETF had a significant drop but stabilized. Over three months, it returns 66.76 percent and returns 397.42 percent annually.