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Why is the cryptocurrencies exchange rate volatile?

Experts believe that the main reason the cryptocurrencies exchange rate fluctuates is volatility of the supply and demand ratio.

To understand the pricing process, it is necessary to differentiate certain groups of factors that underpin price changes and impact the value of the currency or asset directly or indirectly.

External cryptocurrency price volatility factors

External factors encompass trends and events that have a significant impact on the cryptocurrency markets while occurring outside these markets.

The most significant causes of external factors influencing exchange rate fluctuations are:

1. Economic factors that undermine trust in fiat currencies. For example, demand for bitcoin grows when the national currencies devalue, tax and currency oversight gets tougher and economic crisis across local economies and globally manifests itself more and more often. In 2017, all of this occurred quite often which is why the growing exchange rate of bitcoin was nothing out of the ordinary. It should be noted that the growth rates of some other cryptocurrencies have significantly outperformed bitcoin. Their value has grown by 30 to 50 times while bitcoin has grown just by a few times.

Some believe that investing in bitcoin poses the smallest risk. On the contrary, others think altcoins have the most promising growth potential, given that the price of each altcoin today is significantly lower than the price to pay for one bitcoin.

NamePrice24H (%)
Bitcoin (BTC)
$10,642.00
10.20%
Ethereum (ETH)
$226.60
7.48%
Bitcoin Cash (BCH)
$315.25
8.47%
Ethereum Classic (ETC)
$6.05
6.41%
XRP (XRP)
$0.322814
4.22%
IOTA (MIOTA)
$0.306451
7.36%
Monero (XMR)
$84.21
9.37%
Stellar (XLM)
$0.088639
7.49%
EOS (EOS)
$4.11
6.89%

2. Certain laws and the state of the economy. As a rule, cryptocurrency-related news does not impact the exchange rate for too long. However, it is worth noting that this impact can be extremely strong (this directly depends on the cryptocurrency market cap, though). Such an impact can often occur unexpectedly, much like the news itself. News that positively affect demand for the crypto includes:

● Information about software updates. For example, following the successful SegWit upgrade to Litecoin in the spring of 2017, LTC price was growing during the first week and a half. The subsequent price growth was caused by the very news about SegWit being closed down. Once it became clear that bitcoin-based SegWit turned out to be a successful idea, the value of bitcoin increased almost twofold in early August. Compared with the mid-August, bitcoin is worth almost twice as much today.

● Positive feedback about the effectiveness and role of the cryptocurrency from credible economic and political sources as well as media.

● Global economic media coverage which portrays the state of the world economy as negative and inefficient.

● News which highlight the probability of listing cryptocurrencies at stock exchanges (including in the form of futures). Such data positively affects bitcoin exchange rate.

The following factors can negatively impact the exchange rate: news about newly found vulnerabilities in the algorithms of certain cryptocurrencies, news on tightening government regulation of the cryptomarket, security issues and hacker attacks aimed at the cryptocurrency services.

The traders should consider the news carefully and build models which would allow to them to forecast the impact of such news on the cryptocurrency exchange rate. It should be noted that some news is directly aimed at changing the cryptocurrency exchange rate.

Sometimes fake news is spread in order to manipulate exchange rates. Therefore, it is very important to analyze the information in a rational manner and consider the source of the news.

3. Political, financial and economic situation, for example Brexit in the UK. Once Brexit supporters won the referendum, the demand for bitcoin grew. In other words, we can assume that should opponents of European integration come to power in one of the major EU countries, the demand for bitcoin would most likely grow significantly.

Cryptomarket factors causing volatility of exchange rates

Cryptomarket, or internal, factors causing fluctuations of the digital currency exchange rates include factors, the causes of which are limited to the cryptocurrency markets themselves:

1. It is well-known that the larger market cap of a digital currency, the less significant the influence of major players, and vice versa. Bitcoin is a perfect example of a highly capitalized cryptocurrency. Multiply the price of one bitcoin by the total number of bitcoins, and you will get a number exceeding $190 billion. For this reason, the overall market conditions have a significant impact on fluctuations of the value of bitcoin.

NamePrice24H (%)
XRP (XRP)
$0.322814
4.22%
Litecoin (LTC)
$101.27
12.79%
Monero (XMR)
$84.21
9.37%
TRON (TRX)
$0.025704
13.09%
Bitcoin Gold (BTG)
$27.14
2.04%

2. The impact of major market players. “Bulls” are looking to increase the price of an asset at a given time while “bears” are seeking to lower it. Using market instruments and in case market conditions are favorable, they try to influence the price fluctuations. The actions of most traders depend on whether they are inclined to buy or sell an asset at a given time or prefer to wait as well as on their evaluation of the general price trends for a particular digital currency (for example, the possibility of a trend reversal or inflated demand).

3. The cross-currency exchange rates. For example, if the price of bitcoin grows, other cryptocurrencies tend to lose their value in EUR, USD, RUB and other fiat currencies as well as compared to bitcoin. When the value of bitcoin grows, other cryptocurrencies are converted to bitcoin. Only the cryptocurrencies that have significant support from the “bulls” remain stable.

Reverse effect is also possible. For example, this happens when certain altcoins get converted into the other altcoins extremely quickly or when bitcoins get converted to the altcoins more moderately. In this case, the value of bitcoin or altcoins, respectively, drops.

The above information clearly shows that it is not enough to analyze the cryptomarket based solely on the cryptocurrency you are interested in at the moment. At the same time, you do not need to track the exchange rates of all digital currencies currently on the market. Paying attention to the most important changes and news related to bitcoin and altcoins with a prospect of promising capitalization will suffice.

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