Why is Crypto So Volatile? Complete Guide

Despite the fact that cryptocurrencies are becoming a popular form of investment for many individuals and corporations, they are still extremely volatile. This is largely due to the fact that they are unregulated, and the government of China recently intervened in the market. This is why it is so important to avoid overconfidence and underconfidence when it comes to investing in cryptocurrencies.

China’s recent intervention in crypto

Several government agencies in China have taken regulatory steps against cryptocurrencies. These actions are aimed at controlling the flow of illicit capital flows and the financial stability of the country. The resulting effects will have immediate effects on the crypto market. Among the major regulatory steps taken by the Chinese government were a ban on virtual currency derivatives, a ban on the mining of crypto, a ban on token issuance, and a ban on the use of offshore crypto exchanges.

The Chinese government has also begun developing a state-controlled digital currency. This will allow the government to collect and monitor data on the transactions of digital currencies. The move comes in response to concerns about money laundering and fraud. The Chinese leadership is also concerned about losing control over the yuan.

One of the most notable things about cryptocurrencies is the fact that they can be transferred to a different country. This is due to the fact that a blockchain is a distributed ledger that continuously records and updates records of digital transactions. In order to verify a transaction, participants need to agree to a chain of events called a proof of work or proof of stake. This is done without involving banks.

China’s government has a long history of trying to regulate cryptocurrencies, including banning their usage. But the most recent move to ban mining of virtual currencies has been viewed as the most significant step to date. In an effort to combat hidden risks in the mining of crypto, Chinese government authorities pledged to shut down several crypto mining operations. They also vowed to prevent the creation of digital currencies that could threaten the central role of the Chinese yuan.

One of the ways that China’s government can regulate cryptocurrencies is by controlling the amount of energy that is consumed. Because most of the mining operations in China are located in remote areas, they are forced to rely on electricity imported from Kazakhstan and other nations. This is a serious problem for local governments. In fact, the energy consumption of the Chinese crypto mining industry is greater than that of the Czech Republic and Qatar, two countries that are already leading the way in the fight against global warming.

Regulation

Whether you are an experienced investor or a newbie, understanding why crypto markets are so volatile is crucial. Crypto is an entirely new asset class and represents a new financial order. However, unlike other financial assets, it does not have a bank backing, consistent regulation, or a central mechanism to protect its value. This means it is susceptible to manipulation and theft.

Many reasons for mainstream market volatility also apply to crypto markets. One reason for this is that crypto is not well accepted as a traditional asset. In many cases, the immature nature of the digital asset space leads to exaggerated effects of news events. This can temporarily boost the value of the asset. However, these effects are short lived and fall back in the longer term.

The lack of regulatory clarity can also lead to high volatility. The lack of regulation may discourage standard investors from investing in crypto. It also leads to exaggerated claims about potential projects. The lack of regulation can also lead to whales buying and dumping large amounts of crypto, creating a sell-wall effect. This can create massive price swings, which are beneficial to both day traders and long-term investors.

Some analysts have pointed to the China crackdown on crypto trading as a major driver of market volatility. This may be true, but it’s difficult to say for sure. Crypto is still a new asset class, and it will take time for the market to mature.

Another reason for high volatility is the lack of acceptance of crypto by institutional investors. These institutions have yet to enter the crypto space, and this can disproportionately affect the market.

Speculative assets like crypto are also susceptible to the FOMO factor. This means that the market is driven by a high demand for the asset. The FOMO factor also creates a positive feedback loop that increases the demand.

As long as the crypto market remains decentralized, there will be large price swings. This makes it ideal for risk takers who like the thrill of a big swing. However, it can also be dangerous for naive investors. Naive investors are more susceptible to manipulation than more experienced investors.

Avoiding overconfidence and underconfidence

Having a healthy sense of confidence is crucial to successful investing. However, overconfidence is a risky trait that can cause disastrous decisions. Overconfidence bias is the tendency to underestimate risks and overestimate positive experiences.

Overconfidence is often a self-serving bias that leads to a person making a decision and not learning from a mistake. It is also a common trait among traders. Overconfident traders tend to underestimate risks and open too many trading positions.

Overconfident investors rely on subjective opinions, instead of using objective data to make investment decisions. This makes them less likely to ask questions about the risks of an investment. They often fail to consider important questions like the rate of return on an investment. They also often ignore red flags when considering risky investments.

Overconfidence can be particularly dangerous when investors “time” the market. This occurs when people underestimate the payoff time for an investment. They can also overestimate the likelihood of making a profit from a certain investment. Often, overconfident investors make riskier investments than they should in order to generate a 15% return. This can result in disastrous trading outcomes.

Overconfidence is also a problem among financial advisers. Financial advisers tend to be overconfident because they believe they are above average in their field. However, this isn’t always the case. Research by Morningstar found that financial advisers, as well as two-thirds of Americans, exhibit signs of excessive confidence. This is especially true of Gen Z.

Overconfidence can be especially dangerous when traders make trades that exceed their knowledge of a company or industry. The illusion of knowledge created by overconfidence leads people to take on too much risk. Overconfidence can also lead to people ignoring red flags.

Overconfident investors ignore the left-hand side of the distribution. They don’t ask questions about probabilities, and they don’t ask about risk. They rely on opinions instead of valid data and ignore long-term “base rates”. This leads them to make unrealistic expectations and “invest” in riskier areas than they should. They may even throw their investment strategy out of the window when a stock tanked.