Insufficient Understanding of Cryptocurrencies Results in Their Volatility
Explaining cryptocurrency volatility by investors’ lack of understanding.
Bitcoin made the news in May when it passed the all-time high of $2,700 per unit, before swallowing a sharp correction and losing almost 30 percent of its value in 48 hours. Along the way, many other cryptocurrencies such as Ethereum, Litecoin, Dash, Ripple and Monero have followed Bitcoin in its correction.
This scenario naturally leads us to think about the last quarter of 2013, when Bitcoin price jumped from $130 to over $1100. After this boom, we didn’t see a sharp correction, but a long and steady decline to the unit price of $200, followed by a long and steady increase period.
Will the same steady decline happen in 2017? The main difference between 2013 and 2017 is that the ecosystem of Blockchain and cryptocurrencies is widely more developed.
We went from theories and white papers to proof-of-concept, real world applications and significant investments. Nonetheless, little are those who truly understand the underlying technology powering this ecosystem.
An insufficient understanding of the market
Investors have been pouring capital into the market, betting that consumer demand will propel future growth. Cryptocurrencies are therefore subject to significant speculation backed by very little analysis, which makes this asset class particularly volatile.
David Z. Morris, a contributor to Fortune Magazine, explains:
“Just look at how closely various cryptocurrency tokens' prices are tracking each other, regardless of their often very different realities on the ground. Bitcoin is the first and most basic form of cryptocurrency, with a lot of adoption and stability, but relatively few features. Ethereum is a robust ‘smart’ system that is already being widely adopted for building complex data-sharing applications. And Ripple is a mostly privately-held solution focused on interbank transfers. Yet the three tokens' charts for the last few months are remarkably similar.”
Reaching the market stability
According to Robert Sams, a cryptocurrency economics consultant, the volatility of Bitcoin against the dollar on a Bitcoin exchange is about five to seven times the volatility of traditional foreign exchange trading. Having said that, market stability could be reached when power shifts from investors seeking to profit from price fluctuations, to consumers actually using cryptocurrencies.
While most of us agree on the transformative potential of Blockchain within every industry, from incremental changes to true disruption, the road to realizing all those lavish promises is a long one to take.
The gap between true potential and illusionary promise will without a doubt lead us to more rallies and retreats along the journey.