Understanding Why Cryptocurrencies Are So Volatile

2017 was the big year for cryptocurrencies. Bitcoin, the first and largest crypto by market capitalization, grew its value exponentially from $750 in January to over $19,000 in mid-December. Throughout the year, the world watched as the coin gained by staggering percentages in mere hours. Sure, it stumbled occasionally, but ask everyone that jumped on the bandwagon that year and they will tell you that they were certain their Bitcoin investment would be their ticket to generational wealth.

Come 2018, and the bubble burst with a bang. By the end of the year, the market capitalization of all cryptocurrencies had fallen from an all-time high of $813 billion to $100 billion, marking a 90% drop in coin prices.

Experts have been trying to debunk this unexpected crash ever since, and while some blame it all on uncertainty among big investors and increasing regulatory scrutiny, it seems overwhelmingly likely that Bitcoin's rise and fall was due to a murky combination of herd behavior, blind speculation and a wave of poorly informed investors taking over the market.

The crypto world has been commendably working its way back up in recent times. Speculative investing seems to be dying, as people chase long-term functionality and use cases for coins rather than get-rich-quick schemes. Nevertheless, despite the raging “Stablecoin” movement that has spread to Wall Street, cryptocurrencies are still significantly more volatile than other assets. Volatility may have held cryptos back from becoming the global currencies their inventors set them out to be, but you cannot escape the fact that Bitcoin and all the coins that followed were largely propelled by a volatile marketplace.

Understanding Why Cryptocurrencies Are So Volatile

At the moment, therefore, ups and downs are an integral component of the cryptocurrency market. Whether you’re a marketing specialist or investor in the sector, it pays to know why cryptos are volatile. That way, you will perhaps be wiser than the losers of 2018 when the next bubble comes floating.

Volatility explained

In general finance, asset volatility is the measure of price fluctuation over time. While low volatile assets like gold and government bonds have steady prices, high-volatile investments like cryptocurrencies experience rapid changes in value. Volatility is a vital concept for investors and traders because it measures risk. Putting your money on digital coins can bear life-changing returns but conversely, you must prepare for the possibility of massive losses.

Why are cryptocurrencies so volatile?

Volatility in traditional markets is measured by the Volatility Index, but since the crypto world is still in its nascent stages, it is yet to get an acceptable tool. That said, you don’t need an “index” to know that on a relatively stable day, cryptocurrency value can swing more than 10 times versus the US dollar. Here are some of the main factors behind this volatility.

1. An emerging market with low liquidity

Despite the attention surrounding cryptocurrencies, the size of the market is still minuscule compared to traditional trading assets like fiat currencies and gold. Even the $813 billion all-time-high valuation in 2017 is pocket change compared to the $7.9 trillion gold market and the $28 trillion US stock market.

This relatively small market with few participants means that small forces can have extensive effects on price. An investor selling $500 million in gold would mean little for the global gold prices, but convert that to Bitcoin and it is enough to destabilize the market and cause a major price swing.

Additionally, since it only takes a handful of large orders to create soaring or crashing prices, market manipulation, ranging from coordinated pump-and-dump schemes by collectives to malicious inflating or deflating trading volumes by exchanges, is rife in crypto markets. Frequent malicious activity fuels panic, leading to even more volatility.

2. An unregulated market backed by faith

Since the crypto market lacks authoritative entities like governments or banks to drive coin usage, value is dictated by the number of people that have faith in the currency. News events about upcoming regulations, hacking incidents, or negative opinions from seemingly influential tech figures can trigger the widespread selling of coins, rapidly diminishing prices.

On the other hand, overly optimistic news can shoot value up, forming over-inflated price bubbles.

3. An Open Investor Profile

Unlike traditional markets like stock exchanges and real estate, the barriers of entry into cryptocurrency trading and investing are virtually non-existent. You don’t need a trading license, a lawyer, or a pre-set minimal amount of capital to invest. A few bucks and internet connectivity are all it takes to start trading instantly.

Thanks to its free-for-all nature, the crypto market is the environment of choice for millions of amateur traders. The average cryptocurrency investor is far less educated and experienced than traditional stock market traders. Therefore, cryptocurrencies are extremely vulnerable to concepts like “fear, uncertainty and doubt” and “fear of missing out”. In situations where experienced traders might sit back and wait, crypto traders often act without blinking.

4. A market without institutional “big money”

According to a survey by Fidelity Investments, 22 percent of the institutional investors surveyed responded to have already purchased cryptocurrencies. Going by these numbers, you would be forgiven to think that deep-pocket individuals are selling their traditional assets for Bitcoin and Ether. In truth, however, the money coming into the cryptocurrency market from institutional investors is negligible compared to the much they invest in other markets.

Institutions may be more interested in cryptocurrencies today than they were two years ago, but lack of regulations and exchange-traded funds significantly reduces their willingness to get ahold of a large number of coins. Sure, every investor wants high returns, but few are willing to dip their hard-earned wealth into extremely volatile assets. When institutional “big money” stays away from the crypto market, they suffer by becoming even less stable.

5. A “buy today, sell tomorrow” market

When the cryptocurrency bubble was growing in 2017, many financial advisors told their clients to place bets in Bitcoin and other alt-currencies. By late 2018, however, most of the larger brokerage firms had started to ban trading in cryptocurrencies, labeling it as too speculative. This move predictably took potential buy-and-hold investors out of the crypto marketplace.

Today, cryptocurrencies are no longer viewed as the prime option for storing value they once were. Few investors want to "store value" in coins whose prices rise and fall by 10% or more every day. It gives little comfort that Bitcoin could protect against inflation ten years from now if you are at risk of losing out today. Many crypto buyers are still buying coins to sell them speculatively in the short term, which further compromises market price stability.

How PDX Coin is addressing the issue of volatility

To tackle some of these challenges, PDX, a globally compliant digital currency, has been designed to represent the seamless electronic transferability of the value inherent in its underlying physical assets. PDX’s specific structure, independently certified underlying value, and potentially lower market volatility will provide economic advantages to its holders.

PDX believes that massive price fluctuations can be easily mitigated by widespread token ownership and usage, which is facilitated by providing users with easy ways to pay with digital currencies as it is with fiat money. The PDX team is currently laying the groundwork to shortly commence the development of a proprietary crypto / fiat payments app that interfaces with both merchant point-of-sale terminals, physical and online, as well as a consumer's digital wallet.

This innovative digital currency has the backing of underlying tangible assets, that is, physical reserves of crude oil and natural gas, and other energy assets. It offers all of the advantages of blockchain-enabled digital currencies while providing a verifiable asset base to protect its value, stability and security as a medium of exchange. The organization’s Swiss parent, PDX AG, also owns US-based PDX Energy Inc. and as a result PDX Coin has the backing of underlying tangible assets, that is, physical reserves of crude oil and natural gas, and other energy assets.

PDX AG is the principal shareholder in US-based PDX Energy, Inc. (PDXE), which is a roll-up entity for certain oil and gas assets in Texas and Oklahoma in the US, and in Africa. PDXE’s two largest drilling and development projects are located in Zavala County, Texas, and in Chad, Central Africa. Both are large-scale shale oil and gas projects, and together are estimated by Ralph E. Davis Associates, a Houston-based independent petroleum engineering firm, to contain in excess of 2 billion barrels of proved, probable, and possible recoverable reserves, and resource barrels, of crude oil and crude oil equivalents (think natural gas, condensates, etc.)

Original Oil In Place (OOIP) is in excess of 20 billion barrels, of which only the referenced 2 billion barrels is estimated to be recoverable, using current drilling and production techniques, but this number could well increase substantially over time, as production and drilling techniques in the oil and gas industry continue to evolve.

Additionally, PDX is committed to working with domestic and global governmental agencies, financial institutions, traders and users of commodities to develop protocols to help facilitate PDX’s adoption as a leading digital reserve currency.

The idea is once a PDX Coin token has been issued, it can be held, transferred or exchanged, subject to applicable law, either in whole or in part, in the same manner as Bitcoin, Ether or other digital currencies.

These characteristics, together with a focus on transparency and regulatory compliance, position PDX Coin to be a top safe haven digital currency capable of appealing to investors and consumers worldwide, regardless of size or sophistication.

Moving towards a more stable cryptocurrency market

Cryptos have been the new kid in the finance block for a while now but, thanks to value volatility, they are still far from fulfilling their promise as a revolutionary alternative to traditional currencies. Nonetheless, the recent drive for functionality rather than speculative trading is necessitating the stabilization of the assets.

Investors that care about preserving their wealth more than trading for a quick profit should be glad that the time of the “digital gold” seems to be over. By increasingly offering value in the technology behind digital coins, the cryptocurrency market seems well on its way to achieving the stability it needs to take over the world.