The Reasons Behind Market Volatility and How Should Traders Look At It [Brief Explainer]
In today’s market, cryptocurrency garners much attention while also causing investors and traders to express their unhappiness. Cryptocurrencies are still in their infancy compared to conventional currencies. The dangers of investing in this enterprise are great since all new concepts require time to settle and become accepted, and cryptocurrencies are no exception.
The Cryptocurrency Market
The cryptocurrency market was in a frenzy in 2021. There was a cautious approach to the market by dealers and investors. As a result of their investment in the market, they get rewarded handsomely. But in late April and the beginning of May, the market fell dramatically, wiping out the majority of traders’ stakes. The cryptocurrency market’s volatility causes a high level of risk associated with bitcoin investing.
The volatile nature of the cryptocurrency market is primarily because it is still in its infancy. The market, the investment vehicle, and the investors are still figuring things out, so price stability is still a work-in-progress. Bitcoin Evolution can help you figure out the market and how it works through legitimate information it provides. Click here to be connected to reliable brokers.
A tiny movement in the market can affect the price. For instance, a group of people owning large quantities of crypto can impact the market even if it is very unimportant to the overall picture of cryptocurrencies. The stock price can fluctuate rapidly and unexpectedly due to investor attitude movements. It is general knowledge that cryptocurrency prices fluctuate by thousands of dollars in just a few seconds. Cryptocurrency trading is a risky endeavour because of this.
Other elements that contribute to the market’s volatility include the following reasons:
There is no oversight.
In contrast to traditional investments like national currency, stocks, and bonds, Cryptocurrencies are not governed or managed by any entity. According to CNBC, the Federal Trade Commission stated in May that investors lost more than $80 million in bitcoin investment scams between October 2020 and March 2021, which is more than ten times the amount lost the previous year.
Bets are made just for fun and profit.
As a result, the cryptocurrency market relies heavily on speculative trading. Investors placed bets on whether prices would grow or fall to make money. The massive inflows and outflows of cash caused by these speculative bets lead to severe volatility.
Most of the traders are young investors.
Unlike in stock markets, investors in this market did not require trading expertise. In other words, most crypto investors are impatient and frequently shift their assets in the market, which results in price changes and market volatility. Ajeet Khurana, a crypto project advisor, remarked that many young people invest in cryptocurrencies to make a quick investment and profit. When they suffer a significant loss, they are more likely to leave the market, which increases market volatility.
There is a limited supply.
Unlike sovereign currencies or the old financial system, the supply of cryptocurrencies has a limit. Prices are fixed exclusively by the laws of supply and demand because this currency is a digital asset. Some businesses, individuals, or exchanges with considerable crypto holdings may be able to influence the market’s rise and fall by selling or buying more. The crypto community calls them whales. This situation further exacerbates the market’s already precarious state.
There is a general sense of unease.
Because of this, you are investing in cryptocurrencies that carry a significant level of risk. Because of its high volatility and the possibility of enormous losses due to speculative trading, this market has the most critical chance. Because the sector is so volatile, new investors need to be prepared to take risks and accept both gains and losses to succeed. The most important thing to remember is that you need to precisely know what you are getting yourself into and what you anticipate losing.
How should traders look at the crypto market volatility?
Now let’s look at the brighter side of market volatility. As a trader, understand that price movement should exist in the crypto market; otherwise, no trader can make money. The good thing is that it is constant and inevitable for the crypto market. The most important question for investors is how fast the price movement is because it will determine the stability of the coin they trade. Trading in a highly volatile environment is like surfing in a wavy ocean. Yes, it is risky, but it is rewarding, at least in terms of the joy it brings to the surfer. There are ways on how you can ‘ride the wave’.
Be clear with your objectives before entering a volatile market.
You should know that it will be risky, so you have to prepare yourself emotionally. Make sure that you have strategic backup plans when volatility does not favour your side. For instance, you can employ stop-loss risk management beforehand, such as support and resistance stop, moving average stop, time stop, volatility stop, and trailing stop. Once you have set up a stop-loss strategy, the next logical step is to review the risk-control measures you’ve included in your trading strategy, like connecting with professional crypto brokers. Again, make sure you understand why you are entering a highly volatile market. And that is to gain more profit as quick as possible. Be comfortable with this idea. Moreover, you must be aware of the possibility of massive capital loss and be willing to take on this additional risk.
To recap, volatility relates to the rate or magnitude of price change. There is a higher chance of gaining quickly and in a large amount if the volatility is high. However, it takes its toll on the possibility of winning. A higher level of volatility also entails a higher level of risk. When volatility rises, you may be able to make a higher-than-average profit, but you also risk losing a more massive amount of money in a short period.
Calm down and wait for the price to stabilise.
When they witness a sudden price decline, most traders, especially novice ones, panic. They tend to sell their coins right away to avoid losing all of their capital. But sometimes, the best move is not to move at all. Because a highly volatile market goes up and down, it is unlikely to stay on the floor for an extended period. Besides, the crypto you have will not vanish if you pause trading. It’s only a matter of time before you figure out when to start trading again.