Since the start of the year, the price of Bitcoin has increased by more than 400% and other major currencies such as Ethereum, Litecoin and Ripple have seen increases of more than 100% in the same period. One of the main reasons behind this massive rise is due to speculation regarding the future of Bitcoin and other cryptocurrencies in the midst of a global pandemic.
Is The Current State Of The Market Good Or Bad For Speculators?
On one hand, the price rise is a good thing for speculators as it means they can make a profit from their investments. On the other hand, the extreme volatility in the market is a bad thing as it makes it more difficult to predict the outcome of investments. Moreover, when the overall market rises in value, so too does the cost of buying individual currencies on international exchanges which makes it more difficult for speculators to profit.
It’s important to note that these two sides of the coin can both be considered good as a rise in the overall market for cryptocurrencies is important for the industry as a whole. But, volatility is something the entire cryptocurrency community must seek to avoid as it makes it more difficult to gain trust from investors and traders. Fortunately, there are ways in which this can be addressed and the community is already taking steps towards this end.
Why Is The Industry Looking For Ways To Reduce Volatility?
One of the primary reasons behind the recent price rise in the cryptocurrency market is speculation regarding the future of Bitcoin and other major cryptocurrencies in the face of a global pandemic. According to data from CoinMarketCap, the price of Bitcoin at the time of writing is 7,425 USD per BTC while Ethereum is a little under 20 USD per ETH. At these prices, it’s not difficult to make huge gains on investment if you’re savvy enough and have the stomach for the volatility that comes with the territory. Especially as there are people who are making a killing in the market right now. For example, Circle Invest, a well-known cryptocurrency investment platform, reported that in the past three months, its customers have made a steady 27% return on average with its investment products. Similarly, Bitgo, another well-known cryptocurrency investment platform, claims that in any given month, 40% of its customers see returns above their original investments. If you’ve been thinking about getting into crypto-investing, now might be a good time to do so as the prices are high and the interest level is at an all-time high. Especially as many traditional investment vehicles have been sidelined as a result of the pandemic.
Reducing volatility in the market is one of the major priorities for the entire industry right now. For example, Bitcoin’s price rose sharply in the wake of the COVID-19 pandemic in January as people sought safety in a currency that they perceived to be relatively stable in comparison. However, while the general public were scared away from large financial institutions and into a world of decentralised, digital currencies, those at the upper end of the market were busy carving out a niche for themselves by providing alternative investment opportunities in the form of CFDs (contracts for difference) and short-selling as well as medium-sized and large-scale arbitrage investments between cryptocurrency exchanges. These are all ways in which traders can profit from price fluctuations in cryptocurrency markets but, as we’ve established, volatility is something the whole industry is seeking to avoid.
How Is The Industry Seeking To Reduce Volatility?
There are various ways in which the cryptocurrency industry is seeking to reduce the wild fluctuations in the price of Bitcoin and other major currencies. These include;
- Increased transparency via a fully auditable ledger which allows for complete verification of both transactions and ownership of digital assets. This, in turn, eliminates the need to trust in unverified third parties whose interests may be contrary to yours. (Ethereum’s public ledger is probably the most well-known and used example of this but it’s not the only one.)
- Regulation. Governments and financial regulators are starting to wake up to the potential of digital currencies and are seeking to regulate or at least oversee the industry in the same way they do with traditional financial institutions. (For instance, South Korea’s top financial regulator announced in April that it will be taking a more active role in monitoring, analyzing and regulating the cryptocurrency market.
- Consumer protection. As the number of crypto-related fraud cases increases, so too does the industry’s desire to ensure that consumers are protected from bad actors in the market. One way of doing this is via education as well as via providing robust dispute resolution mechanisms that enable claimants to come to an agreement without the need for legal action.
- Standardised contracts. As we’ve established, many exchanges, brokers and other intermediaries in the cryptocurrency market deal in CFDs (contracts for difference) as well as other types of derivatives. These contracts are generally highly sensitive and involve large amounts of money so it’s important that they’re as standardised and efficient as possible. That way, when a dispute does arise, it can be easily resolved without too much back and forth or expensive litigation.
- Increased adoption. While many see the main use case for cryptocurrencies as being as an investment vehicle, some in the industry are seeking to find ways to improve the daily lives of ordinary people. One example of this is MimbleWimble which is seeking to create a more private, instant and scalable version of Bitcoin. In addition to this, some see the use of cryptocurrencies for micropayments and other small-scale transactions as a means of increasing consumer confidence and fostering financial inclusion.
- New markets. The crypto-investing industry is largely dominated by retail and individual traders who want to make a quick buck from short-term investments. However, there are people who want to develop long-term strategies and use cryptocurrencies as a means of providing capital to smaller businesses or ventures that they believe in.
- Segregation of funds. Some in the industry, such as Coinbase and Circle, are seeking to create more user-friendly environments for people who want to get involved in the market. These platforms would allow users to keep their funds in segregated accounts with limited access (eg. via two-factor authentication) so that they can reduce the risk of large losses from trading.
- New applications. The decentralized nature of cryptocurrencies makes them highly adaptable for use in a number of different industries and applications. One of the most well-known use cases for Bitcoin is as a digital currency but it also has a lot of use in the gaming industry as it’s inexpensive and quick to transfer. Similarly, Monero focuses on privacy and is used in various ways, including online drug sales, black market buy-backs and as a means of payment in some esports events.
It goes without saying that, despite these efforts to reduce price volatility, cryptocurrency markets can still be highly unpredictable. However, it’s important to remember that this is an industry that is constantly evolving and seeking to find better ways of doing business as well as providing more attractive investment opportunities to customers. So, as long as the price of Bitcoin keeps rising and rising, people will keep looking for ways to profit from these short-term price fluctuations.