Stocks are one of the oldest traditional assets and have been widely used to invest and generate wealth for individuals and institutions for a very long time now. However, in contrast, cryptocurrencies are a relatively new asset class and have recently gained popularity. Despite their increasing popularity, cryptocurrencies are often considered more volatile than traditional stocks because of the following prominent reasons.
Maturing Asset Class
Most cryptocurrencies have been in the market for just over a decade. And for a maturing asset class, it is no surprise that the volatility is higher than in stocks. Even then, the asset class has managed to reach a total market cap of over $1 trillion. Over the coming period, with the adoption of cryptocurrencies exponentially rising, we are bound to witness the volatility dropping.
Lack Of Clarity Around Regulations
Regulations in the cryptocurrency market are in the development phase. Nations are experimenting with different techniques to chart progressive growth while protecting the interest of the retail folks. As a result, individuals or groups with malicious intent take advantage of this lack of oversight to inflate or deflate the prices of cryptocurrencies artificially. These actions can lead to rapid and unexpected price swings, which can cause significant market volatility.
A clarity in regulations can significantly curb fraudulent activities such as Ponzi schemes, hacking, or scams in the cryptoverse. One of the reasons that cryptocurrencies are more volatile than stocks is the absence of clear regulatory guidelines.
Limited Market Size
The limited market size of cryptocurrencies compared to stocks is another factor that contributes to their increased volatility. As the cryptocurrency market is still relatively small, even a relatively small amount of investment can result in substantial changes in the price of a cryptocurrency.
For example, suppose a prominent investor or a group of investors decides to invest. In that case, it can result in a sharp increase in its price as the demand for the asset increases. Conversely, suppose a large investor or group decides to sell some crypto. In that case, it can lead to a rapid decrease in its price as the supply increases.
This small market size also makes it easier for market manipulators to influence the price of cryptocurrencies.
Unlike traditional stocks, which are often valued based on a company’s financial performance and future growth prospects, the value of cryptocurrencies is primarily driven by speculation and market sentiment. Investors may buy or sell cryptocurrencies based on rumours, news, or simply their own speculation about the future value of the asset.
This type of investment behaviour can result in rapid price movements that are not necessarily based on the underlying value of the cryptocurrency. Additionally, many cryptocurrencies are marketed as speculative investments, which attracts investors looking to make quick profits. These investors may be less concerned with the asset’s long-term value and more focused on short-term price movements, which can further exacerbate the cryptocurrency market’s volatility.
Cryptocurrencies are built on complex technological systems, including blockchain technology, that might be subject to technical glitches and security breaches. These technical issues can have a significant impact on the price of a cryptocurrency, leading to volatility in the market. With new technologies being developed, opportunities also open up for growth and innovation. As a result, there may be fluctuations in the prices of older cryptocurrencies as investors shift towards newer and more advanced technologies.
This gives a chance for investors to keep up with the latest developments in order to make informed decisions. Despite the occasional technical glitches or security breaches, the overall stability and progress of the cryptocurrency industry are constantly improving, strengthening investor confidence in the long-term.
The decentralized nature of cryptocurrencies is another factor that contributes to their increased volatility. Unlike traditional stocks, which are often subject to government regulations and centralized market forces, cryptocurrencies are decentralized and operate independently of any central authority. This decentralized structure can result in conflicting opinions and decisions among market participants, leading to price swings in the market.