As the two most capitalised digital assets – Bitcoin (BTC) and Ethereum (ETH) – rapidly shed their dollar value over the course of yesterday, many new investors to crypto took to Twitter to voice their concerns and displeasure with their losses. But this is crypto investing and this is why they shouldn’t worry too much about the volatility.
One of the most attractive things about the digital assets market to new entrants is the potential to make a hearty profit – i.e., this is an extremely volatile asset class. What a lot of fresh investors tend to forget is that volatility is a double edged sword. If your assent is hasty, then the way back down (correction) is likely to mirror It at some point.
19 May 2021 was an example of just how true that is. The price of Bitcoin tumbled roughly 31%, while market cap runner-up – Ethereum – went through a painful 40% price drop on the day. Both have begun to claw their way back up again and new investors should not expect this to be the last crash of this magnitude – cryptocurrency itself hasn’t changed much since yesterday.
According to the founder of Quantum Economics, Matti Greenspan, “Massive retracements are always scary, but seasoned investors tend to see them as buying opportunities, ”
Why Volatility Is Norm In Crypto
Looking specifically at Bitcoin, there are numerous reasons behind its volatility. One could easily point a finger at Elon Musk and his recent tweets or, Chinese financial regulator’s assertion of their view of cryptocurrency.
However, investors – especially those who are new to the business – need to be mindful of the fact that the same scarcity that fuels Bitcoin price hikes is part of why the price drops the way it does. With roughly 18.7 million of the 21 million Bitcoin supply total already in circulation, the price supply of Bitcoin Lacks elasticity – leaving the digital asset very valuable to sudden changes in its demand.
“A rise in demand cannot result in the increase in supply of bitcoin or increase the speed at which bitcoin is issued,” said former director of research for Fidelity Digital Assets, Ria Bhutoria.
A similar scenario played out in the precious metals market over the past two years. Rhodium, a very rare precious metal of the Platinum Group Metals, increased its value from below $3000 to $21000 per ounce between 2019 and January 2021. This rise was driven by increased demand from the automotive industry, as Rhodium is used in catalytic converters.
Other reasons for Bitcoin’s volatility are the absence of a central authority and its relative youth as a vehicle of investment. The Bitcoin being young means that it is still In the process of figuring out its fair price and price discovery tends to be a volatile period.
Its decentralisation also comes at a cost to investors.
“No central bank or government can step in to support or prop up markets and artificially subdue volatility, Bitcoin’s volatility is a trade-off for a distortion-free market.” said Bhutoria