The value of fiat currency (a lawful tender issued by a country’s central bank and backed by its federal government) is determined by the issuing authority and from parties that trust that money and transact in it. The central bank controls the circulation of currency and thereby indirectly controls inflation.
Cryptocurrencies are not legal tender: federal governments and central banks issue nor back it (with some proposed exceptions, like Venezuela’s Petro). The supply of a cryptocurrency is often either fixed or capped. This theoretically reduces the capacity for inflation.
Cryptocurrencies are also frequently decentralized, in that nobody can control the mechanisms built into them. However, there are frequently programmer groups and foundations providing support for specific cryptocurrencies and platforms. These classes occasionally function as checks on major destabilizing events.
The two cryptocurrencies and fiat money can be used as mediums of exchange to purchase products or services, or as stores of value.
3 Reasons for Cryptocurrency Volatility
Reason 1: New Class of Assets
Cryptocurrencies are a relatively new asset class, and they are still evolving. By several measures, there are 100,000 new users of cryptocurrency daily. This novelty implies that individuals don’t yet know how to appreciate cryptocurrencies, which contributes to volatility at cryptocurrency rates.
Reason 2: Thin Markets
Considering that the size of the cryptocurrency marketplace is limited (its value is estimated to be between $260 billion and $900 billion), changes in investor sentiments can have over-sized impacts on cryptocurrency rates.
The spread (the difference between the price at which the market buys and the cost at the marketplace sells) can be pennies or less for the foreign market but can be measured in dollars for several cryptocurrencies. Emotions drive market rates. Considering that cryptocurrency markets are comparatively small, prices may be more sensitive to negative or positive media reports.
Reason 3: Changes in BLockchain Tech
Blockchain technology can be used for cryptocurrencies, for other uses, or even both. As a result, while Bitcoin is used only as a cryptocurrency, Ethereum tokens are utilized to develop different programs.
The price of an Ethereum token hence depends partly on faith in the Ethereum ecosystem continued dominance, and partly on the purpose for which the token was created and the real-world problem, it intends to handle. This may lead to more complex valuations that change rapidly.
Changes in Cryptocurrency Prices Within the last 18 Months
Like the original, biggest, and many prominent cryptocurrencies, Bitcoin frequently serves a proxy to the cryptocurrency market. This past year, Bitcoin became mainstream, although important Asian economies like Japan cracked down to cryptocurrency.
At the start of 2017, Bitcoin’s price was under $1000 and its market capitalization was under $15 billion.
Within the course of this entire year, Bitcoin’s price surged in value to $15,000, even though regular drops on the negative news (such as after the SEC blocked the debut of a Bitcoin ETF, the forking of Bitcoin into classic Bitcoin and Bitcoin cash, and China’s ICO ban). In December 2017, the market capitalization of Bitcoin was roughly $235 billion.
The mania of 2017 gave way into a selloff in ancient 2018, as the price of Bitcoin dropped to $7,000 by February. The first half of the year was characterized by massive volatility in Bitcoin’s price.
There are lots of potential explanations for the correction of Bitcoin costs in 2018. One is that people who bought at a minimal price sought to realize their profits, putting off a selloff. Advertisement sanctions by Google on cryptocurrency may also have played a role in the decline.
Truth About Cryptocurrency Price Predictions
Bitcoin cost predictions have been around the map. Bitcoin pessimists comprise boutique investment bank GP Bullhound, that has called a 90% crash by the end of 2018. In the extreme end is Harvard professor Kenneth Rogoff’s prediction that Bitcoin will eventually shrink to $100 and GoldMoney CEO Roy Sebag’s projection which Bitcoin’s cost will drop to $0 in the long term.
Bitcoin and altcoin prices will be dependent on various factors, including the availability of alternatives and the development of cryptocurrency regulation in significant economies.
Bitcoin and altcoin cost volatility functions as a cautionary tale: to create continuing interest among shareholders and the general public, blockchains must want to give value (beyond the merely theoretical), solve real-world troubles, and produce durable value.