Experienced investors expect volatility in the cryptocurrency market. After all, the market is still relatively small and the technology is disruptive. Not only that, but cryptocurrency is constantly competing with financial institutions and concerns regulators. Hackers stole several headlines and seemingly-trustworthy initial coin offerings (ICOs) sometimes turn out to be fraudulent. There are many factors behind the volatility, not least of which, is that as Bitcoin goes, so does the market.
With that in mind, let us review the attributes that cause cryptocurrency to be so volatile.
The cryptocurrency market is not yet a decade old. This is why it has a small market capitalization. Consider Apple’s maximum valuation around $900 billion, which dwarfs the entire market. Bitcoin price moves tend to dictate the market. Actually, it is one of the most stable cryptocurrencies. This demonstrates how small the market is by comparison.
Disruptive technologies are often volatile for any number of reasons. They are unpredictable and challenge the status quo. Investors want to find disruptive technologies because they offer opportunities. By the same token, disruption comes with unknown factors, such as, dependability and appropriateness in terms of solutions.
Cryptocurrencies directly challenge highly influential financial institutions. Banking is meant to be stable and trustworthy. However, security must be balanced with return on investment. Cryptocurrencies promise security, but the complex nature of cryptography makes it a challenge for the masses to grasp.
Hacker have penetrated the most secure organizations. For cryptocurrencies that are often a target, this means that headlines make less of an impact. Unfortunately, the industry is synonymous with computing and thus coexists with hackers.
Like most factors responsible for volatility, regulation can be a positive or a negative. Recognition by authority positively impacts market valuation while taxation makes investors hesitant. One of the most negative impacts to the market of late, is the potential for stringent IRS regulation.
China also provided the world with a glimpse of a cryptocurrency crackdown. The country put a major emphasis on ICOs, and America was once believed to be following suit.
Cryptocurrencies are volatile because its development is comparable to a toddler. While finance requires high security, the banking industry and the US dollar demonstrate that currency can be stabilized. Technological innovation impacts hacking, regulation, and industry disruption.
However, disruptive technological innovation becomes standardized as more people adopt a technology. Cell phones in the third world are a good example of disruption to stabilization. It is youth, then, that is the most influential factor to the cryptocurrency market volatility.