With more traditional asset classes like stocks and bonds, the prices will rise and fall mostly based on supply and demand. Sure, mass panic and immense greed can affect the prices of stocks, but that panic, and greed still reverts to the same old supply and demand.
Psychological Influences on Cryptocurrency Prices:
Cryptocurrency, on the other hand, is unregulated and decentralized. A market that basically has no rules and let us anyone trade is going to be volatile. Especially, when you throw in the fact that one small rumor on the internet can spiral out of control through the cryptocurrency news cycle and cause prices to make steep climbs and deep falls.
With cryptocurrency prices and values, you will find that psychology, speculation, rumors, and allegations are at the helm. Cryptocurrency does not follow basic economic laws and investing rules. The science is much different when you break it down.
This can be great if you get in while it is good. But it can also be terrible if you lose a ton of money because someone on some random bitcoin forum started an anonymous rumor about illegal BTC market manipulation.
The Cryptocurrency Crash Of 2017
Back in December of 2017, Bitcoin was at an all-time high of nearly $20,000. Ethereum, Litecoin, and Bitcoin Cash were also at amazing high points at that point in their existence. Within a week, the price of Bitcoin fell to $11,000 — that is a huge drop regardless of industry or asset class.
With Bitcoin losing so much value so quickly, other cryptocurrencies dropped sharply as well. Ethereum, Litecoin, Bitcoin Cash, and dozens of others were not safe from the crash that was instigated by the Bitcoin market. The psychology behind greed caused the BTC bubble, and the psychology behind fear caused this bubble to burst.
As we are in mid-2020, the price of Bitcoin still struggles to break even $10,000
Speculation Can Ruin Markets
Back in 2017, one of the largest trading platforms, Coinbase, had some sort of glitch that caused it to temporarily stop processing transactions and delay wire transfers. This caused the market to panic. But why was the panic so widespread and dramatic?
Well, cryptocurrency is typically driven by speculation. Speculators do not trade by logic; they trade based on how they are feeling emotionally and psychologically.
Because cryptocurrencies are so volatile thanks to emotional trading, and because the types of investors that cryptocurrency attracts will trade primarily on psychological aspects of how they are feeling in that specific moment, you can bet that it will always be a wildly unpredictable realm that can both make you rich beyond your wildest dreams AND take away everything you have in a heartbeat.
Cryptocurrency Bubble = The Dot-Com Bubble Of 2000?
Many TV celebrity finance pundits compared the cryptocurrency bubble to the dot-com bubble from the 1990s. To those pundits, I want to say: YOU ARE WRONG! The fact is, based on inflation and valuation, Bitcoin was more expensive than the dot-com stocks were at the time.
The dot-com bubble inflated because of trading psychology, and it burst because of trading psychology. Cryptocurrency has done the same thing, but on a much higher value. Greed and fear ruled the dot-com bubble from the inexperienced investors that jumped on based solely on speculation, and that is precisely what happened in 2017 with cryptocurrency.
Cryptocurrency is not immune from another bubble
Again, with no rules and regulations in place, and with the attraction of speculative investors who trade based on their feelings and emotions and not facts and logic, cryptocurrency will undoubtedly bubble up again, and that bubble will undoubtedly burst again.
Psychology and emotions rule cryptocurrency more so than facts or logic, so there is a considerable risk involved. However, this also means the potential for a huge reward is also there. Enter at your own risk!