Explaining the Volatility of Cryptocurrency

Bitcoin experienced a rough end to September, with it dropping value by $1,000 to $8,000/bitcoin. $8k may sound like a lot money, but for Bitcoin, it’s nothing but a premonition for what’s to come: an investor nightmare known as the ‘bear’ market, where all cryptocurrency enters a sort of recession.

However, people believe this symbols a ‘bull’ market, where all cryptocurrency increases in value, and this incident is only the fall before the rise.

No matter which side of the aisle you’re on, I find it crazy how cryptocurrency can fluctuate left and right with no discernible cause, but this is one of the downfalls of cryptocurrency: volatility.

Understanding the Science Behind Cryptocurrency

To understand the volatility of Bitcoin and other currencies, we need to look at how they obtain/hold value.

First off, it’s important to remember that anything has value if presented in the right circumstances;since cryptocurrency offers an anonymous way to process online transactions, it will always hold value.

To earn crypto–Bitcoin for example–you “mine” it. Mining Bitcoin is a lengthy, expensive process: not the process itself, but the hardware and electricity required. With every cryptocurrency, there is a blockchain, a list of transactions, behind the scenes.

Getting into the process of mining is a whole other topic, so for now just know that earning Bitcoin is an expensive and timely process. The expenses and time required help keep the amount of Bitcoin in check, similar to governments not printing out tons of money, as the more currency available, the less valuable it is.

With the cons of cryptocurrency visible, the question must be asked: why even use it? Well, the main factor in crypto’s popularity is anonymity. Since cryptocurrency is decentralized–in this case, no banks or government entities interfering–it’s almost impossible to trace purchases made with it to the buyer.

This anonymity makes crypto popular for both users worried about security as well as cybercriminals who purchase contraband. While anonymity is a great thing, it’s also what causes the volatility in the crypto market.

Explaining Volatility

Physical currencies are able to keep somewhat stable due to centralization and regulation: things Bitcoin (and all other cryptocurrencies) lack, AKA no fallback.

Many currencies around the world used to derive value from precious commodities like gold and silver, and the currency acted as a representation of those commodities. Nowadays, most currencies work on a credit system, where the currency holds value through the backing of the government and the economy.

Cryptocurrency works on the same standard; as long as there are people willing to buy it or work for it, it will hold value. However, unlike the dollar or euro, cryptocurrency isn’t necessary for living, so value is easily gained and lost through simple fluctuations in things outside of the currency’s control, such as consumer interest.

We saw this play out in 2017, when Bitcoin exploded in popularity, leading to one Bitcoin costing $19,000 at it’s peak. However, the boom ended and, as mentioned at the beginning of this article, Bitcoin is going through a rough patch, though not its roughest since the boom ended.

In short, cryptocurrencies hold value through popularity and use, and if no one is spending their time mining more or spending their money investing in the currency, then there’s no value to be had.

Conclusion
Cryptocurrency is built around anonymity, but this strength leads to its downfall. Due to the volatility, cryptocurrency will remain a niche currency for the foreseeable future, if not forever. However, with big corporations like Facebook participating in the crypto market, things may be looking up for cryptocurrency. However, things can go just as wrong, especially with Facebook.

We all wish cryptocurrency could be stay as valuable as a coupon for your VPN, but alas, some things are just not meant to be. But hey, at least the popularity of crypto let blockchain become popular.