Everyone who knows anything about cryptocurrencies knows one thing for sure; its value is highly volatile. This infamous reason is one of the biggest qualms toward why masses are hesitant of investing.
Mood Swings Lead to Value Swings
What many try to understand but fail is the reason behind the massive volatility. However, studies conducted at Warwick Business School (WBS) conclude that crypto’s fluctuating value isn’t any specific economic factor – but merely the mood of the investors.
According to Daniele Bianchi, who published the study called “Cryptocurrencies as an Asset Class? An Empirical Assessment,” the investors and their way of thinking are solely responsible for determining the value of digital assets.
Warwick Business School, where the study was conducted. Source: Coventry Telegraph
For the study, Bianchi deployed economic tools to a varied set of traded volumes, market capitalization, and digital asset prices, to evaluate and empirically determine their relationship with traditional investment vehicles. Additionally, fundamental market drivers, like legislation and public outlook, were also considered.
The empirical results suggested a minimal relationship between cryptocurrency returns and traditional assets, such as gold or oil derivatives, but concluded an absence of “volatility spillover effects.”
As per the study, cryptocurrency trading activities are primarily driven by the investors’ sentiment, coupled with a “short-lived effect” of past trading activities, such as a recent bull run at the time.
The study stated:
“Impulse-response functions from a panel Vector Autoregressive (VAR) model show that macroeconomic factors do not significantly drive trading activity in cryptocurrency markets.”
Cryptocurrencies Not a Viable Investment
Speaking about cryptocurrency’s impact on the traditional market, Bianchi added:
“It is believed that cryptocurrencies could potentially disrupt financial services and central banks, therefore posing a risk for the stability of prices and the financial system.”
Giving more perspective on the topic, the study talks about the U.S. dollar and its fluctuation based on various factors like the interest rate of a nation, trade deficit, and government policies. Similarly, crypto prices are based on factors like the projects they’re associated with and the perceived value of the platforms.
The author also labeled cryptocurrency as “not the ideal long-term investment solution,” based on their unpredictable price change.
Iqbal Gandham, Managing Director of eToro, pointed out that customer sentiment is a driving factor in every front where technology is involved, and cryptocurrencies are, after all a technological advancement. Additionally, lack of regulations impedes cryptocurrency price stability, as the market’s investors are always uncertain about several factors.
The research study can be accessed here.