A tweeting billionaire, memes and environmental concerns have all caused wild swings in the cryptocurrency market in recent weeks. And although crypto has matured since bitcoin crashed onto the scene in 2009, experts say volatility will likely continue to be a mainstay of this asset class for the near future.
Earlier this month cryptocurrency prices plunged, falling by 30% or more. This was after Elon Musk, currently the world’s second-richest man, took to Twitter to announce that Tesla was halting plans to accept bitcoin as payment for its vehicles.
The announcement came just months after Tesla bought $1.5-billion bitcoin. Musk cited the rapidly increasing use of fossil fuels for bitcoin mining as the reason for his about turn on the digital asset.
China also recently clamped down on crypto amid climate concerns.
Musk is not new to influencing the trajectory of a cryptocurrency. Last month dogecoin — which was created as a joke, drawing inspiration from the Shiba Inu meme — made stratospheric gains on the back of Musk’s endorsement. A subsequent mention of the currency during Musk’s Saturday Night Live appearance caused it to tumble.
Earlier this week, Musk stirred the market, tweeting about the “promising” efforts by US bitcoin miners to be more environmentally friendly.
“Over the years we have witnessed huge swings, both up and down, within the space of days. And we also know that the more volatile the price, the more risk you take on your money. But then obviously, the returns you potentially stand to gain are also higher.”
Reitz says that although bitcoin is difficult to compare to other assets, other commodities are also vulnerable to influence.
But bitcoin’s immaturity as an asset means that price swings can be more extreme, Reitz says. “When there is a news event, or when something happens that triggers investors, the impact of gold will be less severe compared to bitcoin. This is because it is a much bigger market. It is more mature and more established.”
In the short-term, the price will continue to be volatile, Reitz cautions.
“But if you have a risk appetite for this new technology — if you think that there is a chance these decentralised currencies and their underlying technology will form part of the future — and you attach a dollar price to it, then you take a long term view. And the short term fluctuations should not have any influence on your day-to-day investment decisions.”
Sean Sanders, the co-founder of cryptocurrency investment management platform Revix, agreed that crypto buyers should not be turned off by the recent fluctuations in the market. “But I think they should be very cognisant of what’s going on, because this is the very definition of a high risk and a high return asset class.”
The crypto market is highly leveraged, Sanders explained. Investors use leverage to significantly increase the returns. “Because this is such a volatile asset class, the traders are drawn to it. And that exacerbates the moves.”
He added: “If you look at the cryptocurrency market structure, part of the appeal is that there is this opportunity to make quick gains … and that attracts short-term traders. So it becomes kind of self-reinforcing. I don’t think that’s going to change anytime soon. I think it’s actually just a very key characteristic of this asset class.”