Cryptocurrencies are a type of currency with unique characteristics, such as decentralization, not belonging to any entity or government, or volatility.
We want to focus on this aspect, since it is what makes its price fluctuate sharply.
It should be kept in mind that, when investing, we must take this factor into account. If our investments in cryptocurrencies are oriented in the long term, we can get all kinds of surprises, but they will generally be negative.
The reasons why cryptocurrencies are so volatile
We know that financial markets around the world are always very sensitive to any news.
We have a very clear example with the attacks of September 11, 2001.
By unexpected, and since the money is very nervousthe fall of the main stock markets in the world was notable.
The Dow Jones index lost 684 points, a decrease of 7.1%, while the Standard and Poor’s (S&P) lost 11.6%, registering the sad record of the biggest loss during a day.
Therefore, although cryptocurrencies are not sensitive to inflation, like any other type of product, they are sensitive to news.
Another important factor to explain thehe volatility of cryptocurrencies is the so-called herd effect.
When there is some type of fluctuation that makes small investors nervous, they flee in droves and sell quickly, thus the falls are accelerated noticeably.
The most popular cryptocurrency, Bitcoin, is quite scarce, a limited supply.
In fact, only 21 million units are going to be launched, unlike Dogecoin, with 139,000 million coins in circulation. But the first is still the reference, and as soon as it is she gets coldThey all panic.
Likewise, there is no type of regulation on cryptocurrencies from the government point of view. This is something that encourages volatility, since there is no feeling of product stability.
Without official backing and without any regulation, instability is the dominant trend.
Cryptocurrencies are heavily influenced by market sentiment. But this will have to change at some point, since they are not science fiction, but a reality.
What expert voices say about cryptocurrencies
Paul Veradittakit, from the firm Pantera Capital, provides us with advice to avoid exposing yourself to the volatility of cryptocurrencies.
This is none other than diversifying investments in these assets.
“If you are an individual investor it makes sense that you try to diversify as much as possible, because there are a lot of risks and a lot of volatility in cryptocurrencies, and you want to make sure that you have a lot to choose from, so that hopefully at least one of those investments be successful.
Less optimistic, in 2018, the American economist robert shillerstated that cryptocurrencies followed a Ponzi Scheme.
“Early investors in a bubble make a lot of money as the scheme attracts new investors, and those profits attract even more people. This process can go on like this for several years, until something happens or the pool of potential investors dries up, and the party ends suddenly and painfully.”
The cryptocurrency expert, William Quigley, of Magnetic, It is of the opinion that relevant figures like Elon Musk do not do a good job with their statements about cryptocurrencies.
A person of this relevance and who has millions of followers on Twitter, can make any cryptocurrency vary in price in just 280 characters.
Quigley is of the opinion that it should be “pay attention to Elon Musk’s comments on anything crypto-related, at least in the long term. The worst thing is that he doesn’t know anything about them”.
On the other hand, Ria Bhutoria, former director of research at Fidelity Digital Assets, states that “no central bank or government can intervene to support or prop up markets and artificially control volatility. Bitcoin’s volatility is a trade-off for a distortion-free market«.
The future trend in terms of volatility
Cryptocurrencies have only been with us for 12 years, it is too short a period of time to be able to demand high stability from them.
It is expected that, over time, and when investor profiles are not those of today, the trend will be one of not so high volatility.
The increase in popularity of cryptocurrencies will also result in this value not being so flashy, and not so subject to such obvious changes in its price.
Cryptocurrencies generate great expectations, but as the years go by, this trend may be mitigated. As long as they continue to have that halo, they will captivate those who see a business opportunity in it.
Continue reading: How to invest in cryptocurrencies in 7 steps safely