Volatility In The Cryptocurrency Industry: What Determines Increased Price Fluctuation?

At the start of this year, there was a rush to get into cryptocurrency. The majority of investors were coming to the stock market, albeit hesitantly. They were greeted by the market, which rewarded them handsomely for their investment.

However, the market plummeted hard in late April and early May, wiping off most investors' savings. The magnitude of the slump may be gauged by the fact that Bitcoin, the world's most popular cryptocurrency, fell to a low of $31,000 (approximately Rs 22.8 lakh) in mid-April, down more than 50% from its all-time high of $64,000 (about Rs 47.14 lakh).

The market has subsequently rebounded, but the volatility has remained.

What causes the price of cryptocurrencies to fluctuate so much?

Because it is still in its infancy compared to other kinds of investment and currency, a simple explanation may be - because it is still in its infancy. As a result of the industry's newness, there is a lot of volatility. Investors are seeking to experiment with their money in order to generate riches quickly, as well as to figure out how cryptocurrency prices vary and whether they can affect them.

Consider the case of Bitcoin. Its price has fluctuated drastically so far this year. It was trading below $30,000 (approximately Rs 22.09 lakh) at the start of this year, but it abruptly began to rise in February, and by April, it had nearly doubled.

It eventually fell back to where it had been in January later that month. It began to improve in June, and by August, it had surpassed the $50,000 milestone (approximately Rs 33.83 lakh). However, it fell below that mark once more. For most other currencies, the situation is identical.

The following are some other factors that play a role in deciding price movements are:

1) Practicality

The number of people who utilise crypto coins and for what purpose has an impact on their price. The price will rise if more people use them to buy goods and services rather than just holding them. The coins are likely to gain in value as restaurant chains and internet shops progressively warm up to the concept.

2) Scarcity

This alludes to the cryptocurrency's finite mechanism. The protocol sets the maximum amount of Bitcoins that can be mined at 21 million. When a result, as more people enter the business, there will inevitably be a scarcity of Bitcoin, causing its price to increase. Some coins also use the burning mechanism to increase their value by destroying a portion of the supply.

3) Whales

Accounts that hold vast amounts of a cryptocurrency may begin to sell, causing prices to plummet. These accounts are known as Whales because they have a significant position and can influence the market if a group of them agrees.

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