If you have any cryptocurrency investments, you’ve likely been watching the markets closely recently and noticing plenty of movement.
Cryptocurrency has always been a volatile investment with huge growth followed by large drops rather than a steady climb. As an investment, it is higher risk than other investment opportunities.
That doesn’t mean you shouldn’t invest in cryptocurrency - just that you should make a considered decision.
So, why does cryptocurrency fluctuate so much?
Well, there are a number of factors that contribute to the value of crypto. Let’s look into them now so that you can make informed investment decisions.
Supply And Demand
Like many commodities and investment products such as gold, cryptocurrency is significantly affected by supply and demand.
Part of the price is dependent on how much currency is in circulation at any point (the supply). Some currencies like Bitcoin are limited to how much is in circulation at any one time. So, the closer to the limit it is, the higher prices are likely to be. As cryptocurrency is deregulated, the supply can be controlled by the people who create the currency.
A change in demand can also spike or reduce prices. Say a celebrity or influencer champions a particular type of cryptocurrency - that currency is likely to go up in price as everyone jumps on the bandwagon. This is sometimes the case with a new currency which garners a lot of attention at the beginning. It will lead to initial high prices which then fall as time goes on.
More and more investors are holding on to large amounts of cryptocurrency in a long-term strategy which results in less currency being available for others to buy. This will drive up prices. Similarly, if those popular investors start selling off a certain currency, prices will drop as other investors get worried.
Crypto Is Still New And Hard To Evaluate
While Bitcoin has been around for more than a decade now, cryptocurrency as a concept is still a relatively new commodity compared to something like gold. That means people are still working out how much value it has as an investment.
It isn’t yet a tangible asset, so it can feel like you can’t yet do much with cryptocurrency. You can’t pop down to the shops and buy a pair of socks with it, for example. So its use is still relatively limited. Until it becomes even more mainstream its price may not stabilise.
Its relative newness also makes it vulnerable to the general economic climate. When times are tough, people tend to either not invest at all or look for well-established, safe investments. Riskier investments like stocks and cryptocurrency do not look as attractive which drives the demand for them down.
Another reason for price fluctuation can be exchange issues. Cryptocurrency is traded through exchanges. But, in the early days of a new currency, it may not make it to every exchange, thus making it more difficult to get hold of. Only when it gains momentum and gets listed on more exchanges will demand increase, and the price with it.
Because cryptocurrency is international, it can also be affected by the economic climate in different countries and exchange rates. This might mean the value of your cryptocurrency in New Zealand dollars, should you wish to cash out, fluctuates from month to month.
Rumours About Regulation
One of the attractions of cryptocurrency is that it is decentralised and not connected with any banks or government agencies. But, there are some people out there that believe it should be regulated as a currency. So, any rumours about regulation or crackdowns on trading or paying tax can send the value downwards.
Solid Crypto Advice That Won’t Fluctuate
Want some expert help to keep an eye on your crypto investments? Wise Advice can do that.
Because the crypto market can be so volatile, it’s important to keep a close eye on your assets and stay on top of any market movements. This helps you make the best decisions about your currency and whether to hold it or move it on.
At Wise Advice, we use leading crypto tracker CoinTracking to ensure you get accurate data on your holdings.
Don’t forget you may also have tax obligations on your crypto investments and any trades you carry out. Tax on cryptocurrency can be a difficult area with evolving rules, but our crypto tax specialists can ensure you are compliant while not paying more tax than you need to.