Why is cryptocurrency so volatile?

Traditional investors are relentless in trying to warn us against investing in cryptocurrencies. It’s all over the news... Jordan Belfort also known as “The wolf of Wall Street” is sounding an alarm on the rise of Cryptocurrencies. He believes we are witnessing a bubble. Belfort spent 22 months in jail after pleading guilty to securities fraud and money laundering in 1999.
He said:

There's no regulation on the actual level of bitcoin itself," he tells CNN's Richard Quest. "Yeah there's futures regulation but the underlying asset is completely unregulated. It's a dark market

Belfort mirrors comment made by other investors like Mark Cuban who said:

Only invest in bitcoin if you're prepared to lose your money

Also, legendary investor Jack Bogle said:

Bitcoin has no underlying rate of return…You know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it.

Keen observers of the crypto world know that the Blockchain technology is here to stay and understand the reason why Big time investors like Mark Cuban and Jack Bogle are dismissive of it. Reason? it is the sheer volatile nature of Cryptocurrencies.

Why are Cryptocurrencies so volatile?
Crypto and Bitcoin in particular are still in its nascent stages, but we do know that Bitcoin is capable of volatility in the form of 10x changes in price versus the U.S. dollar. The best investment strategy is to take the long view. The long term investor will always be rewarded.

1 Bitcoin's perceived value fluctuates
With properties that make it similar to gold, Bitcoin’s value fluctuates against fiat currencies is the perceived store of value versus the fiat currency. Its design (bitcoin) is limited to only 21 million BTC. This makes it different from Fiat whose supply is managed by Governments.

2 Smaller market size
Stocks and forex already have established markets. With cryptocurriences the market is much smaller. This means that even small movements of a cryptocurrency can have a pronounced effect on its price. We hope with a bigger market things will get better.

3 Rate of adoption is fraught by bad press
The press is always on the lookout for sensational news. Bitcoin news making Headlines includes the bankruptcy of Mt. Gox in early 2014 and more recently that of the South Korean exchange Yapian Youbit affected prices.

4 Small option value to large holders of the currency
Bitcoin investors with current holdings above around $20M will find it difficult to convert to fiat without disrupting the market.

5 High speculative value
We all know that much of the value of many cryptocurrencies comes from how they might be used in the future. There’s no accurate way to measure how likely such future uses are or how big those future uses might be. So small changes in sentiment can significantly change the expected future outcomes.

6 Taxation of Bitcoin also affects the volatility
Announcement by US IRS of the taxation of Cryptocurrencies will mean two things: The first was the added complexity for users who want to pay with it. Under the new tax law, users would have to record the value of the currency at the time of every transaction. Secondly, the decision to call the currency a form of property for tax purposes may be a signal to some market participants that the IRS is preparing to enforce stronger regulations later.

Conclusion
Cryptocurrency adoption is still in its early stages. Change, especially in technology is always viewed with Skepticism. Volatility is something we will be seeing regularly. I agree with the idea of having 10% of your portfolio invested in these markets and keeping it for at least 5 years. This will limit your exposure and ultimately bring in rewards.

Thank you for reading

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