This is a guest contribution by Nick Rojas
The value of Bitcoin has been a hot topic of discussion in practically every serious financial publication since late 2017, when Bitcoin prices rose above $19,000 USD. However, the elation of many investors was tempered somewhat as Bitcoin prices fluctuated throughout the rest of the month—and at the time of this writing, BTC is down 21% from where it was no more than a day ago. Bitcoin is hardly the most volatile cryptocurrency on the market, either. In fact, many tokens demonstrate erratic behaviour in the marketplace, causing many investors to regard them with caution.
Nobody can predict the behavior of a given token with 100% accuracy, which is why some people swear by investing in cryptos and others won’t touch them. However, it is possible to identify some of the factors that cause the value of tokens to change so drastically. Doing so can provide potential investors with a better idea of the risks involved, and give them clues about which cryptocurrencies make lower risk investments.
Currency Manipulation: a Crypto Epidemic
One of the foremost causes of cryptocurrency fluctuations is artificial inflation, typically via “pump and dump” schemes. These schemes occur when a large group of investors decides to purchase a token all at once, in hopes that the increased activity will attract other would-be investors. If they are successful, the value of the token climbs—but when the original investors sell off their assets en masse, it plummets and leaves the new buyers with tokens that are worth significantly less than what most of them paid. The groups involved in these scams—referred to as “pump groups”—frequently use messaging apps such as Telegram to coordinate the activities of their members.
Some private cryptocurrency exchanges such as Bittrex are cracking down on pump groups. However, their activities are not technically illegal, which they would be if applied to a traditional floating currency. For example, if the same tactics were used to artificially inflate the US dollar, the participants would be found guilty of market manipulation. For now though, pump and dump schemes remain common, and can account for the massive spikes and crashes in many cryptocurrency prices.
Other Factors that Affect Crypto Value
Smaller tokens are much more susceptible to pump and dump schemes than larger ones such as Bitcoin. However, there are several additional factors that can affect the value of a token. For instance, China has completely banned Initial Coin Offerings—the new tokens that some startups use to reward early investors in their businesses, and which are particularly volatile due to their limited volume. China is also taking steps to make Bitcoin mining more difficult, which means miners will likely need to move their operations to other countries and pay higher fees for the electricity they use. Any of these factors could have a negative impact on token value.
The Silver Lining
If all of this is scaring you away from the idea of investing in cryptocurrencies, take a moment to collect yourself. Remember that cryptocurrencies aren’t the only floating currencies that exist—in fact, US dollars, British pounds and most other major currencies are also free-floating, which means their value is effectively no less theoretical than that of any given crypto. While it is true that cryptocurrencies are currently more volatile due to less regulation, it is also true that they will almost certainly become more stable as their use becomes increasingly common. That said, early adopters of cryptocurrency will likely reap huge rewards for their investments once they pass over certain initial bumps in the proverbial road.
Cryptocurrency represents a wealth of new opportunities as well as a few pitfalls, so it is always worth doing some research when you consider investing in it. Use the information provided above to understand the risks and rewards of doing business in the crypto market, and make confident decisions for your financial future.
Nick Rojas wears many hats — business consultant, serial entrepreneur, business and technology journalist. For the past 20 years, this self-taught marketing strategy has worked with small to medium sized businesses offering his personal brand of expertise. His latest adventure includes working with Brilliance.
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