When I talk to newbies in the crypto world or people who are wondering about entering into that business, I often hear about their doubts connected with instability of the market. This is surely one of the reasons of their hesitation. But – no risk, no fun. And no profit.
As research show, the last year has shown the least variable exchange history for decades. On Wall Street people are more often exchanged for computers and in spite of that, four years of price variability on share market may be covered with one month on crypto markets.
Why is that so?
1. No internal value
The crypto market does not any products of services, does not employ hundreds of people and do not grant dividends – this is why the valuation os hard to be done. So you can only rely on the market mood which is often dictated by the media making money on viewership.
2. No regulations
Cyptocurrencies is a global topic but the governmental regulations are in a very early stage. Lack of or modest regulations has many advantages which I described early on the blog. However it also allows manipulations that enhance variability and discourage institutional investors.
3. No institutional capital
The majoruty of institutional capital still remains on the margin as far as crypto investments are concerned. Banks show some interest in digital currencies but as they admit, any major institution hasn’t invested much money or publicly suggested that are going to do so.
4. Short order book
More experienced investors know that it is better not to keep their coins (not all of them obviously) on exchanges because they might be stolen as a result of hacking attacks. This is why most coins are kept in OTC wallets, not in exchange order wallet. Because huge entrepreneurs can easily get around the market and are able to encourage for much actions, the variability is readily increasing.
5. Long-term vs. short-term
A great thing in cryptocurrencies is the fact that there are no brokers in transactions – they cannot be bought on retirement account and are usually unavailable for retail brokers and financial advisors. And thiere is way for all the random croakers who buy crypto, check Blockfolio every 5 minutes and when the price is falling thay sell everything in panic. It is obvious that everyone would like to make much money in a month but you need to have a lot of self-denial and self-discipline to buy and hold. In any other case such sudden moves also contribute to the markets’ instability.
6. Mentality of the herd
Have you heard about the millenials? Those are people who do not trust the government, are familiar with newest technologies and enjoy living in a ‘global village’. But most of the millenials haven’t got any long-term investment experiencewith more mature investors. They starve for risk hoping for investing their spare money inprecarious instruments, even buying ones on credit. When the market starts to decrease, those who cannot afford the waste – lose. When the market starts to increase, they will buy for money they don’t have. If you compare that to the behavior of some serious investors, the effect will be synergistic.
Will the variability factor ever decrease?
I’d say ‘yes’. It’s a relatively young market. In time there will be more and more regulations, institutional investors and more mature users. While the variability may decrease, we also may expect fgradual but steadt growth of the crypto market as a whole – but it seems to be years ahead.