Unlike traditional finance, whose stability is ensured by real factors and fluctuates in relatively small limits, the cryptocurrency market has always been very volatile. On the one hand, this is a plus for those who managed to make money on regular rapid fluctuations in the exchange rate, but on the other hand, these same fluctuations led a huge number of investors to ruin.
However, we can't say that the behaviour of the price of cryptocurrencies is absolutely unpredictable - there are a number of factors that make it possible to predict it with a high degree of probability. And it is precisely these factors that will be discussed now.
This is an emerging market
Despite increased media attention to cryptocurrency markets, especially in recent years, they are still relatively small. Especially compared to the markets of real currencies, gold and securities. Since even the legendary Bitcoin Boom at its peak was only $ 800 billion, while the world gold market averaged 7.9 trillion, and the US stock market alone - 28 trillion.
And such relatively small sizes mean that less significant events are ways to cause more noticeable fluctuations. So, for example, a one-time sale of gold for $ 500 million will not cause a strong market fluctuation, and the same amount in bitcoins can seriously destabilize the situation as a whole.
However, this also has its positive aspects - the ability to “rise” at new and promising projects. For example, information that Telegram developers are going to launch their own blockchain with their own Gram coin immediately received a massive response from investors. And the interest of the media that still lingering in cryptocurrency only contributed to the faster dissemination of this information among potential interested parties.
These are digital currencies
Most of the cryptocurrency market is exclusively digital, that means, not supported by real assets or fiat currency. Therefore, their price depends entirely on the laws between supply and demand. And since their offer is almost always severely limited, and not only at a particular point in time but in principle, the price depends on how many people are now interested in buying a particular coin.
Simply put, while people believe that bitcoin has some value - its price will remain at the level. But should they lose faith in this - they will begin to rapidly sell it. And this may lead other users to also get rid of the "rapidly falling currency." Something similar happened when the "Bitcoin bubble burst." However, this process can work in the opposite direction.
This technology is still developing
Most of the blockchain technologies and everything related to cryptocurrencies is formally at an early stage of improvement and development. Since the very idea of decentralized finance is a little over 10 years. Of course, during the time of active use, many shortcomings and difficulties surfaced. The main one is the deterioration of the network with an increase in the number of active users.
However, the benefits provided by blockchain technology outweigh the disadvantages. Therefore, many information projects are gradually adapting to the use of such technologies. Examples include AdEx, Brave, and Steem.
In addition, new technologies are constantly emerging that allow, if not completely eliminating the shortcomings of blockchains, then significantly mitigate them. For example, the creation of the Bitcoin Lightning network positively affected the speed of transactions, and the Ethereum project allowed to try out a lot of fundamentally new concepts and ideas regarding information technology in general and the blockchain network in particular. And this trend is unlikely to disappear in the near future. However, the release of new, more efficient, reliable and convenient cryptocurrencies can significantly affect the value of old ones. Which also slightly increases volatility.
This is speculation
When investors bet on increasing or decreasing the value of cryptocurrency in order to buy or sell it more profitably, this is speculation. Yes, this is always fraught with some risk, but experienced speculators are ready to deal with it. And high volatility creates the most favourable conditions for them. It turns out a "self-sustaining process." As soon as a slight recession begins, speculators immediately begin to sell cryptocurrencies en masse, causing panic among other market participants. And vice versa.
This is the reaction of the media
The cryptocurrency market is very sensitive to any fluctuations, so it is extremely important to find out about the changing situation in the world faster than anyone else. The one who first realizes - where the course will go due to the next "high-profile event" - can win a lot. However, media information is far from always reliable and objective. So many players react to false “stuffing” and in the best case they lose money themselves, and in the worst case they drag the rest.
In addition, the increased interest among ordinary people in the cryptocurrency market has led the media to actively monitor it, publish a variety of analytical articles and stir up interest with loud headlines. Which also does not always correspond to the true state of activities with cryptocurrencies.
These are the features of the "average investor"
Unlike most financial markets, the entry threshold for working with cryptocurrency is rather low. Neither legal justification, nor licenses, nor even a certain minimum amount of capital is needed. Technically, anyone who has Internet access and some amount in the account can start trading cryptocurrency.
Moreover, many experienced investors fundamentally refuse to work with cryptocurrencies due to high risks and the lack of compensation mechanisms, which seriously limits the intensity of capital inflows to this market.
In total, it turns out that an average investor is a person who does not have a special experience, education, or significant finances. And such investors are very easy to manipulate because they tend to panic in response to any fluctuations and difficulties with finances. Therefore, a variety of “bubbles” and panic sales occur even in situations where professional traders continue to remain calm.
Total
All these factors lead to the fact that price fluctuations in cryptocurrency markets are often unpredictable. Development vectors vary widely and over extremely short periods of time. So even experienced experts, for whom there are no problems with working in the stock markets, can not always guess the real development of events.