Unraveling Crypto Volatility and the Factors Causing It!
Cryptocurrency has now become one of the most popular investment assets, attracting attention from various groups ranging from retail investors to large institutions. Behind its lucrative profit potential, crypto is known for its high risk due to its extreme volatility. Prices that can soar or fall in a short time make it different from traditional financial instruments such as stocks. So, what exactly makes crypto prices so volatile? This article will thoroughly examine the factors that trigger these unpredictable price movements and why volatility is a characteristic of the crypto market.
What is Volatility?
Volatility is a measure of how much an asset's price changes over a period of time. The more frequent and sharp the price changes, the higher the volatility of the asset. This high volatility can be a great opportunity for investors to gain profits in a short time, especially for those who are able to read market movements well. However, on the other hand, extreme volatility can also pose a significant risk of loss, especially for investors who are less experienced or do not have the right risk management strategy.
Crypto vs. Saham
Volatility in the stock and crypto markets is very different, mainly due to differences in market regulation and structure. The stock market, which has long been regulated by institutions such as the Indonesia Stock Exchange (IDX), tends to have lower volatility. IDX implements mechanisms such as Upper and Lower Auto Rejection (ARA and ARB), which limit daily stock price fluctuations to prevent extreme volatility. In addition, IDX can stop trading in stocks that experience unusual market activity by suspending them, giving investors the opportunity to assess the available information without the pressure of rapid price changes.
On the other hand, the crypto market is known for its high volatility, which is largely due to the lack of regulation and supervision. However, since January, the Financial Services Authority (OJK) has begun overseeing the crypto market in Indonesia, which is expected to bring more stability through the introduction of stricter regulations and increased security and transparency of the market. With this move, it is hoped that volatility in the crypto market can be reduced, thereby attracting more investors who may have previously been intimidated by the very high risks.
Factors Affecting Cryptocurrency Volatility
Market Movement
In the crypto world, large volumes of buying or selling have a significant impact on price movements in the market. This is because the size of the crypto market is relatively smaller compared to traditional financial markets such as stocks or bonds, so significant price changes can occur with only moderate transactions. One phenomenon that often occurs is the activity of whales or large investors with significant capital. Large transactions from these whales can create sharp spikes or drops in prices, either intentionally to manipulate the market or simply due to low liquidity. As a result, these unpredictable market movements often trigger high volatility, causing Cryptocurrency prices to change drastically in a short time.
Supply and Demand
The basic principle of supply and demand in economics is very relevant in determining crypto prices. If the supply of an asset is higher than the amount available, then the price tends to rise, and vice versa, if the supply decreases, the price will fall. Bitcoin is the most obvious example of how this principle works, with a maximum supply limit of only 21 million coins. When supply is limited and demand increases, prices tend to spike due to the scarcity created such as when approaching the Bitcoin halving. In addition to Bitcoin, several other crypto assets such as Binance Coin (BNB) implement a coin burning mechanism to reduce the amount circulating in the market, which can trigger price increases by controlling supply.
Fear and Greed
The Fear and Greed Index is an indicator used to measure market sentiment based on two primary emotions: fear and greed. When the index shows high fear, usually triggered by negative news or a significant price drop, investors tend to panic and sell their assets, leading to a deeper price drop. Conversely, when the index reflects high greed, such as when prices experience a rapid increase in a short period of time, investors rush to buy assets in the hope of greater profits, which can create a price bubble. These extreme fluctuations in the index often exacerbate volatility in the crypto market, reflecting how much influence investor psychology has in determining the direction of crypto price movements.
Market Sentiment
Market sentiment is one of the main drivers of volatility in crypto, influenced by external events that affect investors’ perceptions of the security and prospects of the market. Positive news such as Bitcoin’s adoption as legal tender by a country like El Salvador or the announcement of a major company accepting crypto payments often leads to significant price spikes. Conversely, negative news such as a major exchange hack or strict government regulation can trigger mass sell-offs and sharp price drops. Because sentiment can be emotionally driven and often speculative, the resulting price swings tend to be volatile and exacerbate existing volatility in the crypto market.
24 Hours Open Market
One unique factor that contributes to the high volatility of crypto is the 24/7 nature of the market. Unlike the stock market, which has limited operating hours, the crypto market operates continuously across the globe. This means that significant news or events occurring in any time zone can instantly affect prices across the global market. For example, a regulatory announcement from the United States late at night can have a direct impact on the price movement of Bitcoin traded in Asia. This constant nature of the market makes volatility even higher, as there is no downtime that allows the market to respond to information in a slow and controlled manner.
Conclusion
All of these factors contribute to the incredible volatility of the cryptocurrency market, making it one of the most dynamic and sometimes predictable assets available today. As an investor or market observer, understanding these factors can help you make more informed decisions and manage your investment risk more effectively.
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Risk Disclaimer: Cryptocurrency prices are subject to high market risk and price volatility. You should only invest in products that you are familiar with and where you understand the associated risks. You should carefully consider your investment experience, financial situation, investment objectives and risk tolerance and consult an independent financial adviser prior to making any investment. This material should not be construed as financial advice. Past performance is not a reliable indicator of future performance. The value of your investment can go down as well as up, and you may not get back the amount you invested. You are solely responsible for your investment decisions