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Why Are Cryptocurrencies So Volatile? It's Normal. here's Why?

Surely, the value of cryptocurrencies has risen. When the pioneer cryptocurrency, Bitcoin (BTC), launched in 2009, it wasn’t until 2010 that it was first used in a financial transaction: A Florida man paid 10,000 BTC for two large pizzas. At the time, BTC barely had any value (about $0.003). Years later, the internet won’t get enough of how much these pizzas are valued at current BTC exchange rates. There are commemorations of the day this transaction took place and even a dedicated Twitter bot to track the current value of the pizza.


As of February 27, 1 BTC’s value was about $47,500. This value has definitely changed now, so once you finish this read, you can check its latest value on your browser. And that’s the point of this article. After a price rally in recent weeks and crushing the $58,000 mark, BTC lost 15% within two days to close around $49,000. In the same period, Ethereum’s ETH lost about 25%. Several thousands of cryptocurrencies in the crypto market show a similar price trend: Huge gains and huge losses within a short time. These fluctuations (or variations) in the crypto market create uncertainty of prices rendering the market volatile. To understand why cryptocurrencies are volatile, we must understand the concept of money.


The Concept Behind Money

Generally, all forms of money are a store of value, that is, people trust they have value now and will have similar value in the future. Before paper money was introduced, people traded products for other products (barter system). Precious metals like gold were common for making payments. However, these forms of money were cumbersome as they were indivisible and difficult to carry around. So governments introduced paper money that was backed by gold, meaning the paper derived its value from gold. How convenient! You didn’t have to break your back going to the market again. Through the 1900s, governments decided to delink paper money from gold so no commodity-backed it, but the governments’ promise. The money (called fiat currency) derived its value from the governments’ decrees and people’s trust. And what about cryptocurrencies?


Why is there a new form of money? Are people starting to show distrust of governments’ decree regarding fiat currency? Well, fiat currency is governed by a central authority and has an unlimited supply. Governments may decide to print more money causing inflation, sometimes so severe that your money could lose its value in a flash as it has in Zimbabwe and Venezuela. Cryptocurrencies solve these problems as their governance is decentralized and their supply is limited so that their value increases with time (deflationary).


Why are Cryptocurrencies Volatile?

Cryptocurrencies have presented themselves as the currency of the future. But their value fluctuates significantly. 1 BTC could be valued at $40,000 today and in 24 hours it could be valued at $35,000 or better yet $45,000. We all agree this could be scary or fun, whichever way you think of it. Cryptocurrencies’ volatility arises from the uncertainty of them being viable forms of money. In general, most people have not yet trusted cryptocurrencies to store a value that they could redeem in the future. Despite cryptocurrencies having value today, many do not trust that digital currencies will have equivalent or a higher value in the future. Kindly note, this doesn’t mean cryptocurrencies will have no value in the future. It’s just that the people (certainly, not all people!) have not shown trust that cryptocurrencies will have value in the future.


Cryptocurrencies are hardly used as payment options. It is recently that few corporations like PayPal, Square, and Tesla added cryptocurrencies to their operations as payment options. Cryptocurrencies are mainly traded on exchanges and this makes them subject to people’s opinions regarding their future. At the moment, it seems more people think cryptocurrencies are just speculative investments than they are alternatives to money as payment options. The current use of cryptocurrencies is making it difficult to trust this new form of money. Bad press notably affects the values of Bitcoin and other cryptocurrencies. News on industry events like hacks on cryptocurrency exchanges, government policies against crypto, unethical practices by exchanges due to poor regulatory framework are among many occasions that create fear among prospective cryptocurrency adopters and distrust among crypto users.


The varying perceptions on the true worth of cryptocurrencies result in instantaneous fluctuations, propagating even further distrust. However, cryptocurrencies’ value over the past decade has risen, and the trend will most likely continue towards the future.


Is the Volatility Good?

The cryptocurrency industry has grown massively and is becoming costly to ignore. Many banks have started evaluating options for adopting blockchain products like cryptocurrencies. The electric automaker, Tesla, recently bought $1.5 billion worth of BTC, and MicroStrategy holds over 90,000 BTC. These recent events are shifting the narrative regarding cryptocurrencies and may improve people’s trust in them, as reflected in the latest crypto price rally. Even then, the crypto market remains largely volatile. This volatility is especially good for traders looking to profit from the frequent price fluctuations; it is their bread and butter.


As a currency, the volatility of cryptocurrencies could be alarming. However, there should be no cause for alarm. Objectively, cryptocurrencies are an upgrade from fiat currencies and previous forms of money such as gold. The market is still emerging and its technology is improving. More governments are also showing interest in the industry, not in a controlling role, but as one providing policies to improve trust through clearer regulatory frameworks. The current crypto market volatility is expected given that the technology is in its formative stages. The price swings will likely remain a little longer as cryptocurrencies go mainstream and people trust them more. There are no specific timelines for what will happen in the future regarding cryptocurrencies. Their fate as the future money is not sealed yet, but it certainly looks like it.


While the volatility lasts, you could choose to join millions of other traders making profits (and losses!) from trading cryptocurrencies. You can also hold some in your wallet and use them for payments where supported. So you don’t have to worry, the volatility is just fine, and indicates that the crypto market is developing.


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