Everyone who has ever had even the slightest brush with cryptos knows that they are volatile. The question may well arise as to why? Most often, the growth of a particular coin is due to one of three reasons, and they can be news, pumps and listings. Positive news is the most obvious reason for a price hike. In recent weeks, we have seen a jump in the price of Litecoin after the announcement of its fork, we saw a twofold rise in VeChain rates due to the news of its partnership with DNV GL, and we have even noted a 10% increase in Ripple amid reports that Saudi Arabia’s central bank had signed an agreement with the company on the application of its technology.
However, there are some other factors that can get involved. Here are some of them along with an explanation of their effects on the crypto market.
Cryptos have no intrinsic value whatsoever. Despite company sized valuations, cryptocurrencies do not sell a product, earn revenue or employ thousands of people. They do not return dividends in the classical sense. Without any fundamentals to base this information off of, we can only rely on market sentiment, often dictated by the media that makes money on viewership.
While governments are clamping down on the industry, regulation is still very far off. Such limited regulation allows for market manipulation, which, in turn, introduces volatility, and discourages institutional investment, since a large fund has no assurances that their capital is truly secure or at least protected against such bad actors.
Most banking heads admit that there’s some validity in the crypto space, but have yet to commit significant capital or participation publicly. Institutional capital comes in a variety of forms, such as a large trading desk that has the potential to introduce efficiency and soften market volatility, or a mutual fund buying on behalf of their investors for the long term.
Cryptocurrencies, for the most part, can’t be bought in retirement accounts, and are generally inaccessible to retail brokers and financial advisors, so an entire ecosystem of investors is left out. This leaves us with early adopters that are comfortable with the technology hurdle of dealing with wallets, and web-based trading platforms, the same ones that are refreshing Blockfolio every 10 minutes, high-fiving each other when the coins moon, or sweating in a panic when the price drops.
And, of course, there is the herd mentality. Crypto is largely a phenomenon of millennials, who distrust government, are early adopters in tech, and have been mainly shunned out of investment wins earned in the last decade of rising real estate and stock market prices. But most millennials do not have the long-term investment experience of their more mature generational counterparts. They also tend to have less disposable income as a result of historically poor job economics, and less time in the workforce. This combination of factors results in a few things; an appetite for risk in the hopes of landing a windfall of cash and utilizing a larger share of whatever capital they have to invest in risky instruments, including purchasing such investments on credit. When the market goes down, this is money that they literally cannot afford to lose, so will dump at the first sign of trouble. Since this is a reactionary behavior, they will generally lose money before getting out of the market. When the market starts surging up, they will buy with the money they don’t have. As a group, this appears to be coordinated en masse, but it is just the motivations of many single entities that propagate into a herd mentality. If you pair this behavior with the swings caused by large ‘whales’ in a thinly traded market, you have a synergistic effect.
Though the crypto market is still relatively new and lacks many of the traditional institutions of a civilized market, there are projects on the market that seek to indemnify or mitigate the associated risks that investors take when deciding to invest in projects. Cryptics is one such project that seeks to offer the necessary instruments for alleviating the situation with uncertainty. The concept behind it is to support market participants by providing liquidity on exchanges and a safety cushion for retail investors by creating a platform that connects market players and develops algorithms to predict changes in the value of cryptocurrencies. Such instruments based on highly advanced scoring models involving machine learning and AI are incomparable with human intuition that even the luckiest and most prudent investors could ever be endowed with. The multitude of factors involved in predicting a cryptocurrency’s rise or fall are all taken into account by the algorithms that Cryptics employs. Investors should consult such projects as the expense is well worth the ensured profit and peace of mind.