The level of understanding among crypto investors can vary widely. Sophisticated investors may see the infamous price volatility of digital assets as an opportunity to generate profit or simply as teething issues which will resolve over time. Newcomers, however, may panic at sudden price drops and lose their nerve. In this article we look at the causes of crypto price volatility, plus how we can end the volatility forever. We’ll also explore the strengths of decentralised technology and why understanding them is a key advantage when thinking about and investing in the cryptocurrency industry.
The price of Bitcoin, the first ever crypto asset, has gone from virtually zero at it’s inception up to an all time high (at the time of writing) of over $60,000 (USD) per whole Bitcoin.
This has meant that early adopters in the blockchain industry who held onto their coins for several years became fabulously wealthy – while those who lost the keys to their coins by accident became fabulously angry! The news headlines have covered this obvious side of the crypto story repeatedly – but many commenters continue to lack a deep awareness of what crypto really is or why it is valuable beyond short term gains.
Perception Shapes Reality
Opponents of crypto often hone in on the volatility of crypto coin prices, suggesting that this makes crypto a dangerous or poor choice for investment. At the very least, the claim is that this volatility makes crypto impossible to use as an actual currency or store of wealth.
Definition: Price Volatility is a measure of the rate of change occurring in the price of something. We can say that a market is volatile if significant price changes occur at high speed.
The reality, however, is that all of the challenges that crypto faces have either already been overcome in some way or will naturally become less of a problem over time. Additionally, the relative disconnection of crypto markets from the prices of other classes of assets means that crypto assets are well positioned to survive global market shifts that catastrophically effect almost every other kind of investment. Crypto coin prices are driven by quite different factors to other types of investment, which can make crypto a paradoxically safe investment haven when used as part of a diversified investment portfolio.
Of course, it is also true that the computerised and thus highly mentally oriented nature of crypto can sometimes mean that prices rise and fall sharply in response to somewhat irrational thinking. This is somewhat due to the relatively low trading volumes that crypto experiences currently and is likely to change as more and more institutional investors buy into the larger crypto projects.
Crypto is a new invention and is evolving at high speed. Our collective understanding about it is itself affecting the ways in which it behaves – with those who understand it best, being able to repeatedly generate large profits through it’s use – navigating through stormy perceptual waters! Despite price effects caused by surprise announcements by government regulators or ill thought out Tweets by capricious billionaires, there IS reliability to be found in crypto and sense to be made within crypto markets as a whole.
Escaping To Decentralisation
Key to understanding Bitcoin and other cryptocurrencies is grasping how prevailing monetary systems, such as the US dollar, Euro and UK pound are centralised systems, while crypto is decentralised. The national, centralised currencies are run by ‘central banks’, such as the US Federal Reserve, who issue the money and manage many details that affect the money’s worth and usage. In simple terms, if the central banks issue more money, the overall value of the existing money will likely decrease (inflation) and conversely, if money is burned or removed from circulation then the value of the remaining money will increase (deflation). The rarity of a ‘thing’ directly affects it’s value and so affecting the circulating supply of a currency directly changes it’s purchasing power and thus also the wealth of everyone who holds it.
This centralisation means that decisions affecting fiat money (fiat means ‘by decree’), such as US Dollars and UK pounds, are made by a relatively small group of people, in private, often with little oversight by the end users of the money system. End users tend to have little ability to alter the direction that centralised financial systems take. Effectively, this has meant that nearly everyone has been to some extent bound by the decisions made by these almost unknown (and typically very wealthy) people. This has profound implications for society in numerous ways, the most obvious being that everyone’s wealth can be directly controlled – for better or worse – by people that may not care at all for the wellbeing of those outside of their own circles.
Whether you are open to the idea that the world is manipulated by shadowy groups or not, the reality remains that giving power away to others is not a way to build personal empowerment. Leaving the door open for the potential for megalomaniacs to directly influence our personal wealth and therefore whether we can feed our children is not a life affirming policy! A more balanced approach to money creation would afford us all a greater peace of mind and the potential for a wider range of experiences to be explored than is possible with highly centralised logic, thinking and societal structures.
A genius aspect of blockchain tech such as Bitcoin and many other crypto assets is in the way that it provides us with a way to run entire financial systems, including banking (and all other financial services), without the need to have a centralised power structure. The majority of the blockchain software that powers crypto projects has been designed to enable anyone, anywhere, to participate in directly running it’s network infrastructure and to support it’s daily operation.
Essentially, blockchain enables massive scale teamwork that is ‘trustless’, meaning that we don’t need to know who the other people in the the network are or to trust them in traditional ways. Instead, we can know, through the automated maths and logic that are transparently built in to the blockchain, that their financial interaction with us is sound.
In many ways, Bitcoin was a world first, as we have never really had a method of storing value long term that is both reliable and that doesn’t require top-down hierarchic control in the way that fiat money does. Cryptocurrency software is typically ‘open source’ too, meaning that anyone can view it’s source code, replicate that code and make changes to it too. This means that anyone with the necessary skill can now make their own cryptocurrency project and effectively run their own monetary system! This truly takes the power of money as an idea out of the hands of central banks and into the hands of every person on Earth for the first time!
A Catalyst for Change in Society
Some think that novelty is the main driver behind the epic rise of Bitcoin (and other crypto coins), others think it is all hype – but to those who take the time to study the traditional fiat money creation process, human history, physics and other related factors, decentralised technologies represent an opportunity to change human history for the better.
The huge wealth gap and inequality that we see globally continues to have tragic ramifications for a large number of people who are experiencing power loss and seemingly an inability to change their lives in the way that they need to. More-so than investing in an exciting new company or business, investing in blockchain platforms and decentralised tech offers a promise of shifting the power balance of the whole planet into a more equitable and fair state.
Understandably, the view of those who perceive cryptocurrencies to be a catalyst for human and societal evolution is considerably different to those who view them only as a way to make short term profits. Those with a long term and more ideological view may tend to ride out periods of extreme price volatility without panicking, knowing that the technology’s true value will outlive any short term challenges. Meanwhile, short term dabblers are known to let fear drive them to sell on the way down and find it challenging to recover their position later.
Long term valuation of crypto companies stem from much more than religious zeal. The opening up of database content to public transparency in a way that removes overarching control by a central authority enables a great deal of innovation. Since all data in a blockchain is typically visible and verifiable, those using a blockchain to record business transactions, for example, are able to gain a level of trust that they are not being misled by 'middle men' as so often occurs in most industries to some extent.
Blockchain projects for digital marketing have received extensive funding from large corporations seeking to increase the efficiency of their massive marketing budgets. These groups are well aware that prevailing centralised marketing platforms have a tendency to short change them and the corporations have little ability to validate the data that the ad platforms provide them. The benefits of transparency and improved data tracking that crypto marketing offers are motivating innovators in the majority of industries to heavily fund blockchain projects that might help them clean up their own industries too.
Ironically, the lack of understanding about the deeper ideological promise delivered by blockchain companies is part of the actual cause of the price volatility that itself then motivates some people to discredit the technology. If you do not know why this technology is so promising in the long term, then you are more likely to sell at a moment’s notice when the price temporarily drops – a behaviour which itself adds to the overall price volatility. Therefore, by learning about the core principles involved, we do our part in stabilising the price of crypto coins and will help it’s entire evolution as it gains wider acceptance.
Crypto's Energy Usage Is Greener Than You Might Think
Despite claims by some in the public eye, the electricity usage of cryptocurrencies is not a fatal downside of the technology. While it is true that some coins, such as Bitcon, use a significant amount of electricity - mainly due to the 'Proof of Work' algorithm that Bitcoin relies on - they also provide mechanisms that motivate and empower clean energy solutions. In addition, many coins use alternative algorithms in the contruction of their blockchains which are far more energy efficient. Hive is one example of a blockchain that uses 'Proof of stake' in place of 'Proof of work', which is a far more efficient approach - one which the Ethereum blockchain is also due to adopt shortly.
The issue of electricity usage in the crypto space is a complex one and I highly recommend the following educational video that does a good job of clearing up some of the misinformation that has painted crypto in a very negative light lately:
Rarity - Demand for Bitcoin Does Not Affect Supply
Another key and unusual feature of Bitcoin and some other crypto assets with fixed supplies is that no matter how much demand there is for them and no matter how high the price goes, their supply will not be increased. If the price of gold were to skyrocket then the motivation to mine it and to locate it would increase, meaning that people would put much more effort into sourcing it. This would probably eventually result in the price dropping due to more gold becoming available for trade. However, the supply of Bitcoin will not increase regardless of how high demand for it goes.
Since demand for crypto does not usually affect supply, the natural outcome is that it’s price rises – making tokens with little or no inflation a very promising investment for many people.
In fact, the supply of newly created Bitcoin is pre-determined to stop when 21 million coins have been produced (mined). This is projected to occur somewhere around 2040 and this built-in rarity is part of both why Bitcoin is considered a good investment and also why it has the potential to become a stable one.
When Will Cryptocurrency Prices Be Stable?
Prices for established cryptocurrencies are mainly determined by trading activity, including that which occurs on numerous trading exchanges. The current market price of a coin is essentially the most recent price that was paid for it. The less trading there is taking place for a particular coin (low volume), the lower the competition and the more chance there is of the price jumping around wildly.
For example, where a coin has a low trading volume, in order to buy a certain amount of it, a buyer may be forced to pay whatever the small number of sellers are currently demanding for the sale. This may force the price up quickly. Equally, the price may then drop quickly when the situation is reversed. When trading volumes are higher, the risk of volatile price changes is reduced.
Of course, unexpected shifts can still occur when there are high trading levels of a coin – such as may result from a change in governmental policy that directly affects the legal status of a coin. Overall, the more people value the use of a certain coin to store their wealth or to use in daily life, the more trading of that coin will occur. More trading means greater liquidity within exchanges, more competition during the price discovery process and, therefore, greater price stability.
One of the reasons why US Dollars and other fiat currencies are thought of as relatively stable is because they are so widely used and held. If very few people held US dollars, for example, then the price of US dollars would then be likely to be volatile – rising and dropping in ways that made it less attractive as a store of wealth. However, in the case of fiat currencies, such as the US dollar, the central banking systems manipulate a variety of factors to directly alter the value of the currency. None the less, if there were very little of the currency in use, the price would be more difficult to stabilise.
All of this means that as cryptocurrencies gain further acceptance in society and are more easily used in daily life, price volatility should drop. As high street stores begin to accept crypto payments, NFTs gain traction (Non Fungible Tokens – often used to trade pieces of art and music) and ever more people understand the need for crypto – the promise of stable crypto prices gets ever nearer.
Given that Ebay now allow NFT crypto auctions, Paypal allows crypto usage and hundreds of the world’s largest retail corporations are making moves to start accepting crypto payments – we are likely already moving into a new era for crypto price stability.
For now, we can still look forward to occasional spikes in price and sudden crashes. However, those who dive more deeply into the implications of decentralisation of society will ‘keep their eyes on the prize’, knowing that the real value of this technology is measured in human freedom and not in short term numerical profit.
For those who are interested to learn more, more depth and information on decentralisation, blockchain and crypto are available at Crucial Web.
Disclaimer: This blog is intended to offer information for educational purposes only. Nothing within this article is provided as financial advice and should not be taken as such. Please do your own research when investing and consult a financial adviser where needed.