- The crypto market is highly sensitive to short-term investor sentiment, leading to dramatic price swings.
- Lower liquidity in smaller cryptocurrencies can result in significant price shifts with minimal trade volume.
- Continuous, round-the-clock trading causes rapid market reactions, intensifying both bull and bear market cycles.
The cryptocurrency market experiences high levels of fluctuations and dramatic price changes, which are the main factors that cause the formation of dramatic market cycles. As to why this is the case, there are several crucial factors – these are the high risk involved in holding crypto assets, the conditions of liquidity, and, lastly, the aspect of continuous trading.
Speculative Nature of Cryptocurrency
A key reason behind such extreme market volatility is that crypto is often based on irrational and speculative expectations. Most people, and especially those engaged in trading criptodiversification, nowadays invest in the hope of performing high yields, even making decisions based on speculative short-term about long-term profitability. Specialists underline that this kind of activity can lead to the buying or selling of virtually any security to the masses due to the information received.
Liquidity and Market Depth
Another variable that goes hand in hand with the fluctuation of cryptocurrencies is liquidity. Precise in this regard, Bitcoin, as well as other large-cap digital currencies, possesses a considerably higher level of proprietary liquidity as compared with many types of altcoins, the smaller kinds of which are characterized by a rather low level of trading turnover. This lack of liquidity can cause the price to fluctuate greatly because just a few transactions occurring within the market will impact it greatly.
24/7 Trading
Cryptocurrencies on the other hand have no fixed trading sessions, the markets are always ‘always on’, unlike the conventional financial markets that have their fixed operating hours. Combined with this constant flow of trade it implies that the prices are constantly being formed and adjusting to new information and that market sentiment. There is, therefore, a shorter interval in which the market may regain a stabilized state between trades, and thus trades are more frequent and more erratic.
This is why the market cannot afford to stop trading even for a day or a few hours more, which directly tends to amplify its volatility given that it can easily move in either direction as a reaction to some news.
External Influences and Market Sentiment
Market attitude is one of the main reasons for the fluctuating cryptocurrency markets. There are external forces that could affect the investors for instance; changes in law, technology, the influence of media, etc. Also, the actions of such traders as institutional investors or other large ‘whale’ investors can influence the market situation significantly, which is another level of uncertainty.
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