02 / 08 / 21
Why is crypto so volatile? A bull and bear perspective
Despite the fact that cryptocurrencies have revolutionized the electronic payments industry and they are gaining popularity every day, these digital assets have been in the limelight for being “extremely volatile” as well. This characteristic has not only made less-risk-takers more skeptical, but volatility has also wrecked many portfolios.
Please note that various factors increase the volatility of cryptocurrencies; however, we will only discuss the bull and bear perspective in this article. Before we dive into the article, it is worth clarifying that:
Bulls are people who buy cryptocurrencies for the long or short term with a belief that their value will increase in the future, while:
Bears are people who do the exact opposite – they sell their assets (i.e. cryptos) with a fear that the value might decrease
How do bulls and bears affect the crypto market?
Although these two elements exist in every market, bulls and bears have proven to cause drastic changes in the crypto market over the last 10 years, particularly towards the end of 2017 and 2020, respectively. The reason why the volatility is higher in the crypto niche is that a major segment of the market works on sentiments and suppositions, therefore a piece of news has the potential to trigger an extreme bullish or bearish trend, thus changing the entire landscape of the market in no time.
Basically, a bull market is where people and institutions are buying more. It is worth noticing that it’s not just about the action – in fact, it shows an overall sentiment of the market and since the industry starts leaning towards optimism, the demand increases, and therefore, the value starts boosting as well. Another major reason for relatively higher volatility is that the crypto market is not controlled by any organization or jurisdiction and therefore, there are no upper or lower caps for market movements. For instance, if a decently followed figure in the crypto sphere posts a tweet “I do believe Bitcoin is going to be digital gold” and people start buying BTC in masses, the price could skyrocket overnight.
If we talk about a bear market, it’s opposite from its significant other and the “fear” is quite high during this time as people are eager to sell. As a result, the value of the assets starts falling and since the crypto market is quite smaller than traditional stock exchanges, the drop is more significant or rather prominent.
While higher volatility has always been taken skeptically, particularly in the crypto sphere, there are major earning opportunities for traders in both, bull and bear cycles.
For instance, if you (as a trader) detect a bullish trend, you can start investing early and wait for the price to go up until you have made the gains. However, making profits in a bear market is rather difficult and the most common tactic is called short-selling, where traders sell their funds in order to
buy them again at a lower price.
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