Although cryptocurrencies currently have almost one trillion total market capitalization, it is nothing compared to the massive global bond markets or just the stock market.
It is highly unlikely that cryptocurrency will be stable enough to function as a currency until its market capitalization approaches or competes with those of the fiats currencies like USD and EURO. Volatility occurs simply because there is insufficient liquidity.
Consider this. How many different commodities, goods, or services can you exchange your cryptocurrency for? Some, but not many (yet).
But looking at fiat currencies, there is always a way to change your money without really affecting its value. Furthermore, despite continued growth, only a few people, merchants, or services are willing to accept cryptocurrency like Bitcoin. Although this number is starting to grow around the world with the adoption of the lightning network.
In fact, most central banks and regulators are actively working to make it more difficult to buy and sell Bitcoin. As a result, cryptocurrency has less market capitalization and liquidity than fiat currencies.
This is one of the foremost reasons why cryptocurrencies are not stable. Apart from this, other factors influence cryptocurrency instability, which we will discuss in this article.
When combined, all these factors are the major cause of the instability and volatility we see in the crypto markets today.
Factors That Make Cryptocurrencies not Being Stable
The following are the factors that contribute to or cause the instability in the cryptocurrency market today.
Volatility
This is the most significant factor contributing to cryptocurrency’s instability today; how quickly cryptocurrency prices change compared to other currencies is one reason the prices are unstable.
Cryptocurrencies often experience drastic price swings, making it very difficult to be a reliable form of exchange. And this volatility affects cryptocurrency prices in various ways.
When prices are highly volatile, the prices of cryptocurrencies can quickly go up and down, making it difficult for investors to make long-term investments or plans in the crypto market, resulting in the crypto markets’ instability.
And this increased volatility can also result in a lack of liquidity as investors are sometimes unwilling to purchase or buy large amounts of cryptocurrency.
Lack of Regulation
Another factor contributing to cryptocurrency instability is the lack of regulation from the central authorities.
This lack of regulation leads to instability due to a lack of oversight and protection for cryptocurrencies. This leads to a lack of consumer protection which means that investors risk being taken advantage of by fraudulent actors.
The fact that a central authority does not regulate cryptocurrency makes it more prone to fraud and other malicious activities.
And some governments are putting strong restrictions on cryptocurrency, adding to the instability.
For example, in September 2017, China banned Initial Coin Offerings (ICOs) and froze trading in several cryptocurrencies. As a result, the price of Bitcoin and other cryptocurrencies dropped significantly over time.
Speculation and Sentiment
Speculation and hype are among the primary contributors to unstable cryptocurrency prices. For example, when a new cryptocurrency is launched, there is usually a surge of excitement as people learn about it for the first time.
This frequently leads to a rush to buy and sell the new coin, driving up the price to unsustainable levels.
When people believe the coin is overvalued and lose money, the hype and speculation die, resulting in a price collapse as the bubble bursts. It’s not uncommon for cryptocurrencies to experience massive spikes followed by crashes.
Attitudes toward cryptocurrencies can influence the price of individual coins and the overall market. The actual fundamentals of a cryptocurrency can influence sentiment.
Investors have been drawn to Bitcoin and Litecoin because they were the first to offer decentralized methods of transferring money and because they have established technology that aids in storing and tracking transactions.
Investors may also invest as a result of social media or news articles. For example, Dogecoin’s value increased in 2021 as celebrities and entrepreneurs tweeted their support for the meme coin.
Musk even referred to it as “the people’s cryptocurrency.” Bad news or legal and regulatory crackdowns can deter people, but it can also work the other way.
Lack of Adoption
Despite the growing popularity of cryptocurrencies, most companies and businesses are yet to adopt and accept cryptocurrency as a form of payment.
Many lack the knowledge or resources to use cryptocurrencies. This contributes to the instability of cryptocurrency because it is yet to be adopted by many.
Adoption can help drive up values by bringing them into the mainstream and providing credibility to the cryptocurrency industry.
This includes stores that accept cryptocurrencies as payment or apps that allow you to buy and sell virtual currencies.
The impact of mass adoption can be significant, and many investors look to it as a good indicator of cryptocurrency values.
Political events, such as governments banning or publicly opposing the use of cryptocurrencies, could also cause prices to fall.
Without a large number of users, cryptocurrency’s value and liquidity suffer, which brings about instability. This also leads to a lack of trust in cryptocurrency by people in traditional finance. However, with the adoption of newer protocols and layer 2’s, more and more people start to gain trust in some of these systems.
Manipulation
Manipulating cryptocurrency prices can cause instability in the market, leading to rapid and unpredictable changes in the price of digital assets.
This manipulation in the crypto markets occurs in different ways. Many scammers use wash trading, spoofing, and pump-and-dump schemes to manipulate the markets. Or pull tricks as FTX did, and gamble with their user's funds.
These techniques are used to create false demands and artificially inflate the price of a cryptocurrency leading to a bubble that can burst to result in a crash.
Manipulation can also be used to deflate cryptocurrency prices, making it difficult for the asset’s value to be accurately determined. Which could bring good opportunities to those that grasp the real underlying value of the coins/tokens.
Limited Utility
Many cryptocurrencies/altcoins today have limited utility, making them vulnerable to external factors like speculation and manipulation, which can affect them negatively. Especially in many altcoins that are created, we find this problem. Where a large share of them have no utility at all and are either failed projects or meme coins.
This limited utility makes it difficult to predict the cryptocurrency’s price and increases the susceptibility to sudden drops or spikes in values.
All of this adds up to the instability experienced in the crypto market today.
Security
Since cryptocurrencies are new, its also new for many users. Because of this, not everyone understands how to protect their funds or how to safe keep them. This can lead to security breaches or stolen funds. Although this might be a problem for newer users, with time and education this should not be an issue. Just like using the internet safely today is more of a common sense thing.
More understanding of crypto and crypto wallets is thus needed and should become part of basic education over time. So that nobody has to lose their wallet/backup codes.
Complex Tax Laws
Complex tax laws can negatively affect the stability of the cryptocurrency market. Cryptocurrency is volatile, and complicated tax laws can only add an additional layer of uncertainty to investors, making them more hesitant to invest in cryptocurrencies.
And this can lead to decreased demand, fluctuations, and instability of the cryptocurrency. Additionally, the lack of clarity and guidance on reporting and paying taxes on cryptocurrency can create more confusion for people and businesses interested in cryptocurrency.
Will Cryptocurrencies Ever Be Stable
Globally, major central banks and governments are hesitant to support the growth of cryptocurrencies as an alternative currency. As a result, cryptocurrency has a lower market cap and less liquidity than fiat currencies.
Predicting the cryptocurrency market’s future is challenging because it is highly volatile and unpredictable.
However, some experts believe that cryptocurrency will become more stable as more people invest in it and as more businesses and companies adopt it as a means of payment.
And also, if governments start to adopt and regulate cryptocurrencies in the future, this will help to make the crypto markets more stable.
Some experts also believe that the emergence of new stablecoins will help stabilize the crypto markets.
Stablecoins are cryptocurrencies backed by reserve assets, such as fiat currency. They are designed to maintain a stable value over time, regardless of the volatility of the crypto market.
The crypto market is extremely small, compared to other markets. However, as the crypto market grows, the price will become stable, and no one will be able to influence the market easily as it is today.
Ultimately, the future of cryptocurrency and if it will remain stable is uncertain, but there is a high possibility that it could become more stable over time.
Conclusion
Cryptocurrencies like Bitcoin are gaining popularity in countries where traditional monetary systems have failed, such as Venezuela and Zimbabwe.
According to some analysts, it is only a matter of time before other national financial systems begin to fail. This is most likely the best opportunity for cryptocurrencies to gain widespread trust, adoption, and liquidity.
As time goes on, if cryptocurrencies gain more liquidity, have more regulation, and have been adopted by more businesses, then price fluctuations and instability will be significantly reduced.
While the total market capitalization of cryptocurrency is already in the trillions of dollar range, the world’s most stable currencies are measured in multiple trillions of dollars.
When and if cryptocurrency achieves levels of adoption and liquidity comparable to mainstream government-issued currencies, its price will become much more stable than it is now.
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