Why does the price of cryptocurrency change?
If you’ve been around the cryptocurrency space for a while, you may have seen dips and spikes of more than 10% in the price. This is because, compared to other assets such as gold, which has been around for centuries as an investment tool, Bitcoin is still in its infancy, having only been around since 2009.
The amount of money globally invested in gold, for example, is many times that of cryptocurrency, which makes it more susceptible to the whims of buyers and sellers which affects its liquidity. Think of it this way. Say there’s a pizza cut into four slices which is divided among four people, each wanting to buy a slice. These slices represent the shares in the pizza market. If two people decide to return their slices to the box on the back of a rumour about the cheese being bad, half of the market would have returned their share of the pizza, most likely causing the other two to follow suit, completely eviscerating our pizza market. If there were 10 people sharing the pizza, things could have turned out differently. Maybe only three returned their slices while the remaining seven people held on to see if the rumours were indeed true. Or maybe they bought the slices that were returned.
Cryptocurrency’s adolescence means it still has to win the confidence of many buyers and sellers. Based on past experience, the market generally knows that gold, or other relatively stable assets, won’t fall through a trapdoor every time the price drops. They have enough confidence in this not happening that they feel secure to leave their money where it is. For many, Bitcoin has already proved that it is able to do this, though others still need a bit of convincing.