Cryptocurrencies have been on a roller-coaster ride in the past few weeks with prices crashing from highs and then surging again. The market is constantly fluctuating but what could be the main reason behind this recent volatility? Virtual currencies are not backed by any central authority or institution. Instead, they are traded peer to peer on virtual marketplaces called Cryptocurrencies exchanges. Exchanges have become vulnerable to price volatility as traders have gotten more enthusiastic about trading than buying and holding. With so many traders trying to capitalize on momentary weakness, there has been a steady stream of downward price pressure throughout the day, especially in less liquid markets like Bitcoin or altcoins where there may not be as much institutional interest. -END-
What is virtual currency?
Virtual currency exists as a medium of exchange that exists only ‘on a computer’ or ‘in cyberspace’. It is a digital asset which can be transferred between peers and traded like cash. Most virtual currencies are decentralized and distributed. They are transferred electronically and are not controlled or issued by any government or central financial institution like a bank. Although virtual currencies were created in the early 90s, the popularity of the sector has increased in the past few years. These days, people from across the globe are investing in virtual currencies to reduce their dependence on the fluctuating fiat currencies.
Bitcoin and other cryptocurrencies
These days, people from across the globe are investing in virtual currencies to reduce their dependence on the fluctuating fiat currencies. Investing in virtual currencies like Bitcoin is a bit like investing in a promising stock. Cryptocurrencies trade like stocks on exchanges like stocks and bonds in financial markets. They have been soaring and crashing over the past few years and are known for their high volatility. Bitcoin was the first virtual currency, but now there are thousands of them in existence.
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Ethereum and other cryptocurrencies -END-
These days, people from across the globe are investing in virtual currencies to reduce their dependence on the fluctuating fiat currencies. Investing in virtual currencies like Bitcoin is a bit like investing in a promising stock. Cryptocurrency trade like stocks on exchanges like stocks and bonds in financial markets. They have been soaring and crashing over the past few years and are known for their high volatility. Bitcoin was the first virtual currency, but now there are thousands of them in existence.
Market hype and unrealistic expectations
Many investors are getting excited about virtual currencies because of the hype around blockchain technology and cryptocurrencies. The hype is leading investors to expect returns like stocks. However, there is no guarantee that cryptocurrencies will deliver the high returns that people are expecting. Recently, the price of Bitcoin has surged more than 10,000 percent in the last one year. However, the wider market that includes Ethereum and hundreds of other altcoins has risen only about 70 percent in the same period of time. High price volatility like this is nothing new in the stock market, but it is surprising in the cryptocurrency market.
Liquidity and volatility in cryptocurrency exchange market
Cryptocurrencies have become popular as an investment opportunity. For investors, the most important thing is to find a reliable place to trade their virtual currencies. An important point to consider when looking for a cryptocurrency exchange is the liquidity of its market. A good exchange should have a large number of traders and a broad range of virtual currencies to choose from. If an exchange has a small number of traders and a narrow range of virtual currencies, then you may find it difficult to sell your virtual currency when the price drops. In addition to finding a reliable exchange, you must have the foresight to know when to exit your trade. You can’t just hold on to your virtual currencies when they drop in price. Instead, you must sell them at a profitable moment to avoid losses.
The recent price crash of Bitcoin and other cryptocurrencies is a warning sign for investors. The price volatility and sharp drop in prices are happening due to a surge in market sentiment and not because of any structural change in the market. While the idea of virtual currencies sounds exciting, investors need to remember that they are not backed by any government or central institution. The only way to make money from cryptocurrencies is through trading on exchanges. In the long run, the best strategy is to invest only a small portion of your investment portfolio in virtual currencies.