As far as volatile stocks go, few are as unstable as cryptocurrency. For as many investors who’ve earned fortunes investing in cryptocurrency, several others more have accrued massive losses, with many going utterly bankrupt, even.
All over social media, many experts and analysts predict the rise and fall of crypto tokens. Today, you hear that Ethereum will go up by a certain percentage. Tomorrow, speculation may involve a specific projected drop-off in the price of Solana.
Still, there are cases where investors get wind of massive asset selloffs, prompting a drastic price drop in favor of an alternate token, and the only beneficiaries are those in the know when these “pump and dump” events happen.
Despite crypto’s inherent volatility, many coins have historically maintained a healthy range regarding price movements, meaning that price adjustments have not strayed too far from the projected average over a long period. By using a crypto price tracker, it is possible to keep abreast of these key stats.
However, if time has taught investors one thing, crypto price adjustments happen abruptly, entirely without warning, and often to damning consequences. The year 2022 best typifies this, as the almighty Bitcoin has crashed to less than one-third of its worth in mid-late 2021.
The altcoins have equally poorly fared, as Ethereum, Solana, Polkadot, Litecoin, and others have taken massive hits in recent months. The market is in a worse state than it’s been since Satoshi Nakamoto released his Bitcoin whitepaper to the broader public. And things aren’t necessarily showing signs of improvement.
In fact, many market watchers and experts would have you believe that the market will drop even further, given how many blockchain market institutions are facing liquidity problems. The truth is that the cash reserves are suddenly looking incapable of catering to the needs of investors desperately looking to sell off assets.
Despite this, many brave traders are still risking hard-earned funds in braving what now looks like the murkiest of crypto markets to date. Some will be successful, and some will not. Whatever the case, it’s essential to understand the hows and whys of crypto volatility.
That is to say that it is crucial now, more than ever, to understand what makes cryptocurrency go up and down. Luckily, this article will explain all about it in detailed depth.
First, we’ll examine how cryptocurrency works…
How does crypto work?
It is impossible to talk about cryptocurrency without speaking of the blockchain’s underlying technology underpinning its functionality.
The blockchain is a unique digital mechanism of transactional record keeping that’s unmatched by any technology available in fintech today. Blockchain technology is what modern-day fintech aspires to be in its immutability, transparency, scalability, speed, and overall efficiency.
Cryptocurrencies are unique to the blockchain. Often referred to as digital currency, it is easy to mistake them for a form of e-currency that has utility outside its home ecosystem- the blockchain. And herein lies a myth that must be corrected- cryptocurrency belongs to the blockchain and cannot be used outside the network.
Nevertheless, its value is so because of the blockchain’s near-perfect efficiency and ability to record crypto transitions- it’s the ultimate digital ledger.
Cryptocurrencies are traded on exchange platforms, with their values primarily determined by a combination of several factors, some of which will be discussed later in this article. Their underlying technologies differ slightly, leading to sub-categories such as asset tokens, governance tokens, security tokens, stablecoins, and more.
The most popular cryptocurrencies, such as Bitcoin and Ethereum, have large followings, typified by their substantial market caps and trading volumes. These crypto tokens are featured on major exchange platforms and are accepted means of payment in many real-world institutions.
Naturally, you’d expect such tokens to perform better than others in the market. However, they aren’t exempt from market volatility. There are other factors involved, and this is why new projects can shoot out of nowhere and have their values quadruple overnight, with seeming success stories experiencing starkly contrasting fortunes- an abrupt crash and complete dissolution.
So, it’s time to examine some of these other causal factors:
Demand and supply
This is perhaps one of the most apparent factors, given that cryptocurrency is an economic asset and is, as such, bound to the fundamental laws of demand and supply.
Every commodity is influenced by demand and supply, and cryptocurrency tokens are no exception. An excellent example of this dynamic is the pioneer token, Bitcoin. Bitcoin was designed to have a fixed supply- 21 million coins in circulation. Presently, the bulk of these Bitcoin tokens has been minted, with only a few left.
Given the limited supply, its price is expected to increase as the circulating supply approaches the limit.
It’s impossible to dismiss the dynamic interrelationship between demand, price, and supply, and the “pump and dump” mechanism further highlights this.
As price increments are intrinsically linked to limited supply and high demand, it is possible to artificially create demand to benefit from the resulting sell-off or purchase of tokens. Although such scenarios are understandably challenging to recreate in the cryptocurrency and blockchain ecosystem, there have been several instances in the past where concerted groups sought to artificially “pump” the price of a token through specific techniques.
Although these techniques vary, the methods are ultimately the same, and speculation plays a massive part in the scheme. In many cases, the token to be “pumped and dumped” is a scam project whose proponents take to online spaces for informal and formal massive marketing campaigns.
The speculation involves a lot of social media posts, memes, and interactions, to the point that they get everyone talking about it. And when this happens, investors only naturally hold high hopes for seemingly popular projects. With the increased demand comes a spike in the coin’s value, to the benefit of the scheme’s proponents.
Afterward, when the token is eventually “dumped,” given its ultimately useless utility, the only ones to have benefited are the original group of speculators who’d earlier purchased a near-worthless token for basically nothing, selling it for considerable sums in the “boom” period.
This example highlights one way through which crypto scammers operate. Yet, it is also a reason for the rise and fall of crypto values: the simple power of demand and supply.
Crypto exchange listings
Another factor that affects the price of cryptocurrency tokens is their listing status on exchange platforms.
A cryptocurrency exchange platform is a decentralized marketplace for peer-to-peer blockchain trading. The mainstream exchanges like Coinbase and Binance list the most popular tokens as Bitcoin and Ethereum. This is a given, given that the two tokens are the largest by market cap in the industry.
However, the case differs for new tokens, projects, or obscure coins. Here, market liquidity comes to the fore, as these mainstream marketplaces are so because a lot of trading happens there.
Most tokens listed on the big exchange platforms have relatively higher values than those exclusive to the smaller exchanges. The reason is simple- for the latter, there is reduced access to the token for investors. Coupled with the reduced market liquidity, it’s almost impossible for the value of such a coin to rise, and not enough people are trading it.
Cost of production- mining
Although this does not apply to proof-of-stake blockchains, it is still a considerable reason why crypto goes up and down.
Blockchain transactions must be verified on the network via a series of consensus mechanisms, the most popular of which is proof-of-work.
The proof-of-work mechanism is used today by the two largest cryptocurrencies, Bitcoin and Ethereum, even if the latter is switching to an alternative consensus mechanism soon. The mechanism involves mining new blocks to be added to the ever-updating digital blockchain ledger.
The process is complex, featuring the solving of various algorithmic puzzles to provide the necessary security layers required to validate each blockchain transaction.
The puzzles, quite naturally, cannot be completed manually. Instead, they require energy-intensive computers, graphics card,s and systems known as mining rigs to be completed. Mining is a lucrative business today, given just how much power is needed to mine a single block.
In fact, much of Bitcoin’s success today owes to its miners, who channel vast amounts of power into constructing complex rigs. This, in turn, affects the price of the crypto token, seeing that its production/maintenance (mining) cost is very high.
Operating protocols
A significant contributing factor to the rise and fall of cryptocurrency tokens is its internal governance protocols.
Crypto networks generally don’t operate on the same set of rules, with developers tweaking them frequently to suit the needs of the community.
For example, governance tokens offer holders voting stakes in project protocols, as the users take joint decisions on blockchain-related issues such as utility and mining. A token may see its value rise or fall depending on how efficient the operating protocols are.
Conclusion
Several other factors contribute to crypto’s volatility, and it’s important to note them at all times. As an investor, you need a one-stop solution like CoinStats for all things crypto to get real-time news, updates, and relevant information.
Finally, you should never stop educating yourself, as blockchain is an evolving technology. Keep abreast of the latest technologies as regularly as you can!