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If you have spent some time with cryptocurrencies, then you know how volatile their prices can be. Which raises the question, how do these types of digital currencies compare with traditional currencies? Especially considering that neither is supported by gold or anything else of value.
The easiest difference to identify between the two currencies is that traditional currencies have the support of centralized governments. These governments declare their currencies as legal tender. The value of Fiat currency is derived from the central government that declares it. This means that everyone who owns the currency puts their trust in it.
This is the case for most countries around the world today. Central banks control the supply of money, monetary reserves and, indirectly, the rate of inflation.
On the other hand, cryptocurrencies do not fall under the aegis of a central authority or a government. Many regions do not recognize them or accept them as legal tender.
Furthermore, cryptocurrencies generally have their offer repaired, which means that the devaluation of digital currencies through inflation is essentially non-existent.
The two currencies also share some similarities. Both have a relative reserve of value and both can be used as a method to purchase services and products.
Why do Criptovaluta prices fluctuate so much?
One of the main reasons why cryptocurrency prices move so much is due to the new market. In addition to knowing the terms "blockchain" and "cryptocurrency", most people are not yet familiar with this financial sector.
Emerging markets have certain qualities that make them volatile. Let's have a look at some of them:
- Lack of liquidity – Compared to a traditional and consolidated market, the cryptocurrency market does not offer much liquidity. The difference in total market capitalization between fiat currency and cryptocurrency exceeds $ 89 trillion. This is a 36,000 percent difference.
- Daily trading volumes – The daily trading volumes of Criptovaluta are around $ 14 billion. The traditional markets, on the other hand, are around $ 5 trillion.
- Thin market – Market changes quickly, which means that the volatility of digital currencies is expected to increase.
- New users: every day a large number of new users joins the cryptocurrency sector. Recent reports show that over 100,000 new users become part of the digital currency industry on a daily basis. Many new users are interested in determining whether specific cryptocurrencies are moving up or down. This serves to add to the volatile nature of the market and burst breaks.
- Price manipulation – This came to the fore with the recent BCH fork. Price manipulation can be spread in the new markets. Central exchanges manage the flow of cryptocurrencies, which means they have a lot of incentives to grow their revenues. One way they do this is by artificially manipulating cryptocurrency prices. This is done by checking the displayed price feeds to convince traders to buy or sell certain currencies.
This type of behavior and manipulation is multiplied only when you add the hundreds of thousands of new members in the industry. These nascent users are easily exploited. Furthermore, it is difficult to prove that price manipulation occurred in an unregulated market.
You will also find out that central exchanges have only one point of failure. These cryptocurrency bags handle a lot of digital currency. If they are violated, it can have a significant impact on the price of other cryptocurrencies.
Determinants of the price of cryptocurrency
The number one determinant in the cryptocurrency price is the supply and demand. This is Economics 101. If a specific digital currency has a large amount of supply but no demand from users and merchants, then its value will decrease. It also works in the other way. If the offer of a cryptocurrency is limited and is in great demand, the value of the currency will increase.
The thought behind this is related to the scarcity element. This helps to increase in value and contributes significantly to the reason we saw Bitcoin reach almost $ 20,000 USD last January. The Bitcoin supply is limited to 21 million BTC. This number is rather low compared to other cryptocurrencies. As a result, the demand for money has soared.
Public sentiment and the media can also be key factors for the prices of digital currencies. For example, if a specific platform or token gets a negative print, you might see the value of that coin suffer a hit.
On the other hand, high-profile coverage and media support would almost certainly cause a price increase. Therefore, the price of digital currencies is very much influenced by the hype and human emotions.
Of course, there are other factors that determine the price of cryptocurrencies. For example, the utility of a token can have an impact on its price. Is it really solving a problem or is it just another coin that takes up space on the market?
Finally, the difficulty of extracting a currency could affect its value. If a currency is difficult to extract, then it is more difficult to increase the overall supply of the token. Therefore, the market could see added upward pressure on the price if the demand for money is high.
Pricing accuracy of cryptocurrency prices
Just as there are no guarantees with traditional markets, the same can be said of the forecasts made in the cryptocurrency market. There were those from both extremes that tried to make predictions for 2018 and beyond.
Some famous CEOs and experts predicted that Bitcoin would have risen above the million dollars, while others tried to remain more modest. However, suggesting that Bitcoin could reach $ 125,000 by the end of 2022 should be taken with a pinch of salt.
But we can not have all rainbows and unicorns all the time. On the other side of the market, there are those who predict nothing but sadness and darkness. The market will fall and the price of Bitcoin will drop to less than $ 100. Some even suggest it will be useless before the end of the decade.
Regardless of the part of the spectrum in which you are located, there are some things you can keep eye on that will help you better understand how the market can move. For example, if new rules and regulations are imposed on cryptocurrencies dominating the market, a downward trend could be observed.
Remember, cryptocurrencies still have less than a decade, so the market for them will be highly volatile for now. There is no way to predict or determine in which direction the market can move, but there are always indicators that can help you get an idea of what you can expect.
Regardless of what, exercise caution when investing in cryptocurrencies. Just because a currency you own is worth hundreds or thousands today, does not mean it will be the case tomorrow.
Image source: "Pexels, Flickr"
