What Makes The Price Of Digital Assets So Volatile?
The digital asset market (cryptocurrency) is considered a volatile and risky investment. Therefore, getting guidance from a Tennessee financial advisor near you can help fine-tune your investment strategy to help you hedge against inflation with cryptocurrency. To diversify your portfolio by adding digital assets, among many others, it will help to identify that they fluctuate in price due to:
- Investor expectations about future performance fixed on the asset
- The quality of services or products supplied by the issuer
- Technical reasons (such as bugs/errors)
- Regulatory concerns about security or financial stability
- Wider market conditions (like sharp declines in equity markets)
A financial advisor in Greeneville, TN, is here at Sapiat to shine a light on how this investment can help to reach your financial goals. Use this guide to get started investing in cryptocurrency!
Understanding the history, facts, and benefits will help you determine whether investing in crypto is right for you and how to go about it.
Adding digital assets to your portfolio as a viable option
You might wonder how these “digital wildcards” differ from traditional investments and what makes them so exciting. Because there aren’t physical assets backing crypto, it might feel strange or even scary to consider at first. However, if you’re willing to accept the risk associated with crypto, it can turn out to be highly worth it.
The price of digital assets fluctuates in response to many factors, as listed above, so let’s dive into them here.
Digital assets supply and demand
Like other asset classes, the price of a digital asset is determined by supply and demand. The number of buyers can affect a digital asset’s price, but the number of sellers truly sets prices.
Supply and demand create tension between buyers and sellers in any market. As more people try to buy something, the price increases; as more people try to sell something, the price decreases.
Digital assets and investor actions
Let’s be honest when it comes to thinking about investors and how they react/or not.
- Investors are not always rational.
- Investors can be influenced by news.
- Other investors can influence investors.
- Social media and other factors can influence investors.
The price of cryptocurrency fluctuates for technical reasons
There are many reasons why digital assets fluctuate, but fundamentally, it comes down to the fact that no one can guarantee how much a particular digital asset is worth.
- Digital assets are not backed by any physical asset. They’re not backed by a government or central bank like currencies such as the dollar.
- Digital assets are not backed by other assets (such as gold and silver).
- When you buy stocks and bonds, you buy an ownership stake in a company or government entity. You have some rights to that company or government entity’s future profits in the form of dividends on your stock shares and interest payments on your bond holdings. Those payouts may be reduced or eliminated if something goes wrong with the business or country.
- This same principle applies when trading cryptocurrencies like Bitcoin: if something happens (like a hack leading to stolen funds), payouts can be forfeited.
So technically speaking, it’s the same game, just in different methods. We can help you determine the best cryptocurrency to invest in through the right comprehensive financial planning strategy.
The price of digital assets fluctuates due to regulatory concerns
Regulatory agencies focus their concern on the potential for fraud, money laundering, market manipulation, and cyber security threats. To protect investors from these risks and ensure that digital assets can be regulated like other financial products, regulators must make some key decisions about how they want digital asset regulation to look.
Sapiat advisors in Tennessee can help you understand why and how our asset management differs from the rest to put your mind at ease by opting for wealth management focusing on long-term success.
The price of digital assets fluctuates due to the expectations of future performance fixed on the asset
Another primary reason for the volatility of digital assets is that everyone who owns them has an expectation of future performance fixed on the asset. This means that when many investors believe that an investment will be worth more in the future, they are willing to pay a higher price today. On the other hand, if they think it will be worth less in the future, they will sell their holdings at any cost.
This expectation-based behavior leads to short-term price swings and makes digital assets risky investments for some who buy and sell them frequently over short periods. Investors must be aware that doing so often causes significant gains or losses due to sudden changes in market sentiment rather than underlying fundamentals such as supply and demand dynamics.
Work with a financial advisor at Sapiat to invest in digital assets carefully
We’ve covered a lot of ground in this article, but we hope it’s clear that the price of digital assets will continue fluctuating. An experienced financial advisor can help you make the right investment decisions based on your risk tolerance, time horizon, and financial goals. A fee-only, CERTIFIED FINANCIAL PLANNER™ Professional at Sapiat will work with you to invest in appropriate cryptocurrencies for your portfolio.
It’s essential to understand how these fluctuations work so you can make informed decisions about whether or not they’re suitable for you—and if they are, how best to manage them.
If you have any questions about digital assets, contact us today!