Why There Have Been Fluctuations in Cryptocurrency Prices?
The biggest disparity between the fiat money and cryptocurrency values is that ventral governments control the fiat currency. The same body also declares fiat money as legal tender. The value of fiat money comes from the fact that the government has stated that they have a certain value and that two parties doing a transaction believe in that value.
Cryptocurrency, on the other hand, is not controlled by a central government or authority. Also, in many parts of the world, cryptocurrencies are not recognized as legal tender. Most of the time, cryptocurrencies tend to have a fixed supply, which is why their prices are rarely affected by inflation.
It is worth noting that the same aspects support cryptocurrency prices and the fiat money value. They can both be used as a trusted medium of exchange to acquire services and products.
The cryptocurrency, as an industry, is still new, and even as the term gets common, quite a number of people are still unfamiliar with it. There are lots of benefits that can be enjoyed in nascent markets. But they are also highly volatile in nature, which makes understanding them a little hard.
If you compare cryptocurrency to other established markets such as traditional economies and foreign exchange markets, it has limited liquidity. To be precise, the overall value of money in the whole world is more than $90, while cryptocurrency value amounts to $250 billion, which is a difference of 3,600%
Trading Volumes
Each day, the total trading volumes of cryptocurrency amounts to $14 billion, while the forex trade is about $5 trillion. The difference between the buying price and selling price of cryptocurrencies is always a few dollars. This indicates a small market that moves very fast, hence the high volatility of the cryptocurrency prices.
Each day, a good number of new cryptocurrency investors join the market. For instance, in 2018 alone, it was reported that the cryptocurrency market adds at least 100 000 users each day, which is considered a speedy growth. But this has also been shown as one of the primary factors that cause the high volatility of the market.
Biggest Determinants of the Cryptocurrency Prices
As of now, supply and demand are the hugest determinants of cryptocurrency prices. This is a straightforward economic principle that is self-explanatory. For instance, in case a cryptocurrency has a high level of supply with narrow demand from users and traders, then the value of cryptocurrency will plummet.
However, if the supply of the same cryptocurrency is limited while the demand is significantly high, then the coin’s value will increase tremendously. It can be summarized that the scarcity element plays an integral role in regulating the prices of cryptocurrencies.
The Bottom Line
There is an exact match in the value of fiat money and cryptocurrency in that they are both affected by the level of demand. The level of demand is inversely proportional to the value of cryptocurrency. However, we believe that as the industry keeps getting familiar, its level of volatility will change.