One of the most surprising things about Bitcoin and other cryptocurrencies is how volatile they are. This can seem especially shocking if you’re used to holding traditional currencies, like the U.S. dollar or the Euro, which generally move up or down just a fraction of a percent on any given day. In contrast, Bitcoin has seen daily moves as large as 15% in either direction over the last year alone! This volatility makes it seem like investing in cryptocurrencies is too risky but why does it happen? And what does it mean for investors?
Media sector’s role
The media sector includes websites, blogs, news channels, television and radio stations. The digital currency has captured headlines recently, even though its market capitalization is much smaller than stocks in technology giants such as Amazon and Facebook. People began buying into digital currencies such as bitcoin at the end of 2013 after a nearly five-year bull run in which prices increased from $13 to more than $1,100. But they have since plunged by 60% or more in just a few weeks after hitting record highs.
Some people see investment opportunities; others predict governments will crack down because of fears that virtual currencies are used for drug trafficking and other illicit activities. There’s also fear that speculative investors may be taking outsize risks with money they can’t afford to lose. As with any asset class, there are positives and negatives. When you invest in a stock, your goal is to buy low and sell high but how do you know when an asset’s price has reached an unsustainable level? How do you know when it’s time to get out before things go south? All the responses to the above are mostly influenced by what is trending in media.
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Investor’s role
Although many people who purchase Bitcoin intend to hold on to their investment for years, others plan to spend or invest their money in other ways. To put your money into a volatile asset, you need to be an informed investor. That means looking beyond just one-day market prices and investing strategically over time. An investment strategy is different for everyone, so think about what is most important to you when making decisions about how much money you want to risk losing and how much you want to potentially earn.
In addition, remember that a profitable investment strategy doesn’t just mean maximizing returns; there are other factors that can influence your decision-making as well. For example, if security is your main concern, then consider keeping some of your assets in cash or physical gold. If you’re planning to make regular purchases with bitcoin e.g., paying rent, then consider buying bitcoin directly instead of holding onto it long-term. You might also want to spread out any large purchases across multiple exchanges and wallets that way if one exchange gets hacked or shuts down unexpectedly, you won’t lose all of your assets at once.
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Availability of Bitcoin in relation to demand
The underlying cause of bitcoin’s volatility is its status as a relatively new commodity. The cryptocurrency isn’t widely used, which means that its value can fluctuate wildly depending on supply and demand. As bitcoin usage increases, so will acceptance, reducing its volatility. Of course, if one day we do wake up to a universal economy based on cryptocurrency, then perhaps bitcoin’s wild price swings won’t seem so shocking after all.
Until then, keep in mind that volatile doesn’t necessarily mean bad. If you don’t want your money tied up in investments with slow growth potential but high risk, consider putting some cash into bitcoin or other cryptocurrencies. You could end up cashing out big when they become more mainstream or losing everything if they crash and burn altogether. But remember: investing isn’t without risk no matter what form it takes. For most people, especially those just starting out with investing, cash equivalents like bonds are likely a better option than stocks or commodities like bitcoin and safer too!
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Conclusion
While not all cryptocurrencies behave in such volatile ways, there are many that do. As an investor, you need to be aware of which ones are more likely to see huge swings before deciding whether or not to buy them. That said if you’re on a long-term investment strategy and aren’t planning on selling for several years, using something like bitcoin to get around capital controls can be helpful in diversifying your portfolio.