Cryptocurrency price trends are too volatile. Still, if we note the actions and movements of assets in the crypto market, we can conclude a significant uptrend over the past few years. Amid the global COVID-19 pandemic, many projects in the industry have grown to make its investors millionaires and billionaires.
Everyone is obliged to step into the market following the gains, but the volatility stands before them to make them all speculative. But the question is whether we should be concerned about volatility?
Cryptocurrency price influencing factors
Cryptocurrency price is mostly depending on the law of demand and supply. Adoption is one of the most influential factors that affect prices. How many people are embracing the coins, and for what purpose? How many crypto owners hold their funds or spend them buying goods and services or holding? Node count and the number of active wallets also tell how assertive the coin community is.
Another factor is the scarcity of crypto assets. Less the total supply, more the value. Notably, to maintain the value of the cryptocurrencies, many projects burn some circulating coins by steering them to an irretrievable address.
Market cap is computed by multiplying the entire circulating supply of the currency by the price of each coin. It is the most reliable predictor of stability and can be analyzed using a trade graph. Consistent market cap value shows that the cryptocurrency is more stable. Moreover, a market cap reckons what crypto is worth on the open market and the market’s view of prospects.
Exchanges and regulations also influence the prices in the cryptosphere. If the coin is not available in many exchanges, including some mainstream exchanges, then not many people will be able to purchase the coins. Simultaneously, a lack of regulatory clarity also hinders the adoption of assets like Bitcoin and Ethereum. Certain regulatory agencies do not relish these assets’ unregulated and decentralized nature.
Crypto whales can also manipulate the prices unintentionally. Sometimes, wallet addresses holding large crypto amounts start selling, resulting in a price crash.
The aforementioned factors are a few that are currently affecting prices in the cryptosphere. To give an outlook on the overall mechanism of cryptocurrencies, multiple things determine the value of the digital assets. Unsurprisingly, there is no error-free way to clinch this factor. Therefore investors must conduct their proper market analysis and consider all the risks of investing.
Why are crypto-assets volatile?
Cryptocurrency price trends are grabbing the fancy of investors, but volatility is one of the most arguable topics in the industry. We should note that cryptocurrencies has no extrinsic value, meaning no precious metals or anything endows their value. Indeed, the real value of these assets comes from how extensively people are willing to trade them in exchange for goods and services, other crypto assets, or government-issued fiat.
According to Tharman Shanmugaratnam, Chairman of the Monetary Authority of Singapore:
“Cryptocurrencies can be highly volatile, as their value is typically not related to any economic fundamentals. They are hence highly risky as investment products, and certainly not suitable for retail investors.”
Many investors hold their cryptocurrencies as a hedge against inflation or investment instruments. However, the prices are entirely based on speculation without any intrinsic value backing the assets, which is also said to be educated guesswork. And investing in something speculative is a guaranteed way to bring volatility to our portfolio.
According to Cam Harvey, Senior Advisor and Research Affiliate:
“What’s going to happen to Bitcoin? It’s really unclear. The price is not just driven by the money-supply rule, it’s driven by other speculative forces. That’s why it’s multiple times more volatile than the stock market.”
Besides, many also believe that the market is volatile because it is still nascent. The result of the newness of projects and development is high volatility.
Notably, when investment value is not very grounded, the prices get very sensitive to even slight changes in investors’ perceptions. Investing in such speculations is essentially like a hot air balloon ride.
How accurate are cryptocurrencies’ price predictions?
In the cryptocurrency market, traders and investors use fundamental analysis and follow the project’s news to forecast the price. Still, it is distressing that the predictions are unreliable. Usually, financial instruments’ price predictions come to pass. But more often, such analysis never comes to fruition.
While noting the price actions and investors’ sentiments, it is observed that one of the major concerns in the market is the lack of adequate analytical support. Outlandish price points always tempt most investors.
If someone holding crypto priced at $0.001 can easily believe that the price of the coin will surge to $10k in the future because they want that to be true. But it is consequential to understand that most predictions are delivered without evidence and analysis that could sustain them.
Following the scenario, we can say that cryptocurrency price predictions are overhyped.
Crypto market has made queens and paupers
The Crypto market has been rapidly growing over the last few months. If we observe what is happening in the market, we can say that digital assets have made queens and paupers. Most wins and losses did not necessarily come from individuals picking good digital assets and losers picking bad ones.
According to Sharmin Mossavar-Rahmani, Head of Investment-Strategy Group, Consumer and Investment-Management Division, Goldman Sachs Group INC.
“Something with a long-term volatility of 80% can’t be considered a medium of exchange. Just because everybody piles into an idea and talks it up doesn’t mean it’s a store of value.”
Whether one wins or loses is dependent largely on time because virtual assets are incredibly topsy-turvy investments. To make wealth quickly, many investors endeavor to experiment with their funds. Many are looking to scour how the prices in the most volatile markets fluctuate or whether they could influence them or not.
Following cryptocurrency prices tells us that before investing in the asset class, we should note that we are ready for a rough ride. But there is no doubt that many are earning a luxurious life through this bumpy ride.
Howard Lutnick, CEO of Cantor Fitzgerald LP says that:
“Why is Bitcoin where it is? Because retail keeps buying it. This is just another form of the same thing. GameStop was Bitcoin and Tesla.”
And when we scrutinize most of the crypto traders yielding passive gains from the crypto market, we found that they have a crypto chart reading sense.
Can reading crypto charts help make passive gains?
Reading cryptocurrency price charts helps traders find the best opportunity to enter or exit. Reading and understanding charts are also known as technical analysis, and it explains market trends. Investors can also predict future prices or sentiments of a particular asset with a good understanding of charts.
As per Fred McAllen, author of Charting and Technical Analysis.
“Charts really are the footprint of money.”
Analyzing trends compiled over time helps to understand how the supply and demand of a precise asset influence its future trends. Moreover, it will help make well-informed decisions based on when investors should anticipate bullish and bearish sentiments to end.
Although trends and patterns help find the best possibilities, they have some caveats.
Charts can explain everything about the asset
In 1884 Charles Dow helped to concoct the first stock market index. The index’s invention followed the creation of the Dow Jones Industrial Average (DJIA), which chased the 30 largest publicly traded firms in the US. At the time, Dow acknowledged that the traditional financial market was a reliable way to reckon with business conditions within the economy. Furthermore, it was feasible to analyze the stock market by pinpointing major market trends.
However, Dow’s theory underwent some adaptations with the contribution of several other analysts. And now, the theory has six main components known as the six tenets of Dow theory.
Among the six, the first tenet of the theory is one of the core principles of every technical analysis. The principle illustrates that the market echoes all available information in the prices of the assets and the prices of such details accordingly. This principle is close to what’s nowadays known as the Efficient Market Hypothesis (EMH), which states that the prices reflect all available information and trade at their fair value on exchanges.
Indicators that can help predict the future of any asset
If someone is looking to make cryptocurrency price predictions to gauge the future, observing a few technical indicators is significant.
The Relative Strength Index (RSI) is a momentum indicator that measures whether any cryptocurrency is overbought or oversold. The tool shows data as an oscillator ranging from 0 to 100.
On Balance Volume (OBV) indicator is focused on a crypto assets trade volume. It is believed that when it comes to crypto, trading volume is the major driver of prices in the market. Hence, the tool rises and falls following the trading volume of the days included within a specific period. This tool can help confirm trends and estimate whether traders should see rising prices.
Moving Average Convergence Divergence (MACD) measures the disparity between the 12-day and 26-day EMAs. Following the difference, the indicator forms a MACD line and pinpoints both buy and sell signals.
Bollinger Bands, developed by John Bollinger, helps traders determine short-term price movements in the prices of cryptocurrencies.
Difficulty in analysis in the cryptosphere
Crypto investors should always note that cryptocurrency price is inherently tricky to probe. Even the creators of the leading projects in the industry have a challenging time keeping tabs on all of the latest coins and tokens.
It is challenging to successfully filter out the useful information from an ever-growing pipeline, similar to the cryptosphere. The industry is so immature and untested that we have no proven norms, theses, or techniques to evaluate where prices have been and where they are going.
Even when cryptocurrency price prediction uses analysis in a sophisticated and suitable way, there will be many elements that the community does not know about yet.
Conclusion
Potential and reliability are the two most significant considerations when selecting digital currency. Price changes of cryptocurrencies are near-constant and may not be feasible. Investors should keep a healthy dose of suspicion because cryptocurrency price chart predictions are unreliable as the entire market is volatile.
However, the cryptocurrency price is ultimately dependent on the law of supply and demand. And we can witness that many of the projects have limited supply and many institutions have major holdings. Thus, although the crypto market is more volatile than other markets. Still, the risk can be rewarded with high returns.
According to Michael Saylor, CEO of MicroStrategy Inc.
“Bitcoin is less risky than holding cash, less risky than holding gold… Volatility isn’t really a reason to sell. Right now this is the only thing we can find with a positive real yield.”
We can convey that volatility is not the foe of cryptocurrencies, as it is the only thing that brings high returns to the market.
Hence, cryptocurrency price volatility is not a big concern.