Why Cryptocurrencies Are Such a Wild Ride

Posted by on September 11, 2017 12:00 pm
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Categories: volatility

What takes a month in the stock market, takes a day in the wild world of cryptocurrencies. Here are a few reasons why Bitcoin, Ethereum & Co. offer an especially volatile ride these days. Again, this only seems to be the beginning of the crypto boom, market capitalization is likely to double each year. Yet, be careful out there:

“News” from China is to blame

Last week, the Chinese financial platform Caixin reported that China has banned so-called ICOs — a popular crowdfunding method in the crypto scene. This news was based on government sources and led to panic selling. The exchange rate of the major crypto currencies collapsed.

Yet more China “news”

At the end of last week, the same newspaper reported that China could take far more drastic measures: a fundamental ban on the exchange of cryptographic currencies for the state currency yuan was being considered. Caixin did not provide a credible reference to the source — but the report was still disseminated. Soon after, the Wall Street Journal reported on the coming ban, based on unnamed sources. In the nervous cryptography market, a few rumors are enough to change prices rapidly.

It’s Goldman Sachs’ predictions!

At the beginning of August, Goldman Sachs price analyst Sheba Jafari predicted that the bitcoin price would continue to rise — only to fall to halfway. The predictions were discussed in the crypto scene. All the more so as it was in fact true, at least partially. How low the price of Bitcoin will continue to fall — or how high it will rise — will become clear in the weeks and months ahead. However, it is undisputed that many speculators are guided by the information provided by established analysts.

It’s the fault of speculators!

The lucrative trade in cryptocurrencies has attracted various fortunate knights and gold diggers: they do not necessarily believe in the new technology, but instead believe in a fast return on investment. While investors believe in growth over a longer period of time and accept short-term price fluctuations, the speculator acts nervously. This fuels trends. Be it upwards or downwards.

The Asia factor

Most cryptocurrency trading is done in Asia, with especially China and South Korea driving the markets. They’re gamblers after short-term profits, not HODLers looking for long-term value.

It’s the “weak hands'” fault!

Among the speculators there are many small investors with a narrow budget and little experience. They usually follow traditional trading patterns — which makes them predictable. They become bait for bigger investors, which lead trading bots and sophisticated algorithms into the field.

It’s all about manipulation

In a market that reacts so intensively to rumors, manipulation is the name of the game. When it comes to that kind of money, the spread of rumors is rarely a coincidence. Quite a few speculators therefore believe that any collapse of a token’s price might be caused by a so-called crypto whale, a major investor, in order to gain access to a more favorable price.

General uncertainty as a cause of volatility

In fact, the ownership or trading of cryptocurrencies is anything but a safe investment. Fundamental questions have not yet been answered: when will governments a.k.a. central banks intervene with regulatory requirements and what will they look like? Are the many promises — and many projects are no longer just promises — kept? Can the cryptocurrencies correct known deficiencies (transaction speed, usability, security)? Only when these issues have been clarified will the volatility in the market decrease.

It is only a price correction

On January 1, 2017, a Bitcoin still cost less than US$1,000 (963 to be exact) and Ethereum was below US$8. Today the Bitcoin is valued more than US$4,000 and Ethereum some US$290. The price for a Bitcoin has quadrupled within one year. The price of Ethereum has increased nearly 40 times. With such increases it is abundantly clear that price corrections can also be dramatic.

An ordinary day of crypto trading

Who is still surprised by these crazy market moves? Cryptocurrencies are like religions: there are various currents, many gurus and various believers who fight each other, and almost even wage war. But there is hardly any real, fundamental knowledge about what the hell is truly going on.

You have to be an agnostic to be able to deal with the wild mood swings of cryptocurrencies.

My take of the current volatility? Pure consolidation. Resistance become support levels, and off we rocket to new highs in an overall bullish trend.