Why bitcoin price is volatile? That’s the question a lot of cryptonauts would like to have answered, right? It’s an important issue, of course, and it merits some serious discussion and an explanation that makes sense, and it’s rooted in reality. In this article, we’ll offer you an answer (or, at least, part of a solution) to that question.
Maybe the most similar conventional market to the cryptocurrency market is the foreign exchange (Forex). That would be because of both markets trade in currencies (digital in crypto, fiat in Forex), but that’s where every similarity ends.
The Forex market capitalization is, quite literally, all the money available in the world while crypto’s is of roughly USD 245 billion, which is a drop in the sea by comparison. Forex moves about USD five trillion daily, by contrast. There’s just no comparison. Forex is the world’s largest market, while crypto remains very small. And that’s why crypto is so volatile. Let us explain.
It’s all about liquidity
Any Forex trader worth their salt will tell you that the main reason behind any currency’s volatility is lack of liquidity (aside from natural disasters, tragic news, and things of the sort). Higher liquidity begets higher stability in prices. That’s why, for instance, fiat currencies in Forex move by fractions of a cent when they do. That’s in stark contrast with Bitcoin, for example, which has doubled in value in only a few weeks.
Crypto’s volatility makes it an exciting market in which there are many opportunities to get rich quickly. But high gains only come at the cost of higher risks, so there are also plenty of opportunities in crypto to lose everything up to your shirt. Because of low liquidity.
So what is liquidity? It’s a high volume of trade, availability, and activity in a market. Here we go back to the Forex vs. crypto volumes (6 trillion vs. 245 billion). The enormous amount of traders, assets, and value that’s traded in Forex all the time makes it impossible to disrupt the markets by dumping money or withdrawing it. The cryptocurrency market’s volume, on the other hand, can be affected by a single large order, even when it comes to Bitcoin.
We don’t need to search too hard to find an example of this. The current bullish run on Bitcoin (if that’s what it really is, the jury is still out on that) started when an unknown Japanese investor placed a single large order to buy Bitcoin. That movement alone raised the Bitcoin price by USD 1000,00 in only sixty minutes, and that’s how the ball started rolling.
Bitcoin is the market’s giant, it’s the one coin that’s really hard to affect because it’s capitalized at USD 145 billion. That’s a large number, for sure. But not enough to guarantee the market’s stability. Imagine what a large order could do in cryptocurrencies with a capitalization that’s in the tens of millions of dollars of which there are hundreds.
This is not to say that the cryptocurrency market is fraudulent. But it’s indeed quite obscure, and it’s amenable to manipulation.
So what would it take to have a stable market for digital assets? Liquidity, of course. It will be hard to achieve, but it’s not impossible. Maybe it’s unavoidable. When (and if) digital currencies as Bitcoin (along with the market’s larger ones) achieve capitalization in the order of trillions, chances are we’ll never see the wild fluctuations we’re used to so far. That’s years in the future, however. The prospects for higher profits by facing higher risks will stay with us for quite some time yet.
Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.