What Makes the Crypto Currency Market Volatile? 6 Key Reasons


Assets which have lower market depth will require smaller amounts of capital to have a large impact on the market. Therefore, this process of individuals all coming to adopt bitcoin in different ways and timeframes necessarily must produce volatility. Volatility is a byproduct of price discovery, and there is no other way for price discovery to happen in a free market.

Why is crypto so volatile now

Bitcoin crossed the level of $31,000 in July 2023 and is again at a low in August 2023 at $27,000 but has shown immense recovery in October at the level of $34,495. When media outlets announced Proshare’s introduction of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks. Investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange, causing a price jump to more than $69,000. It’s not uncommon to hear an opinion from someone heavily invested in Bitcoin stating that the currency will soon be worth hundreds of thousands. Others hype newly invented cryptocurrencies to try and take away market share from Bitcoin.

Why Is The Crypto Market Down In October 2023?

“Massive retracements are always scary, but seasoned investors tend to see them as buying opportunities,” said Mati Greenspan, portfolio manager and founder of Quantum Economics. Bitcoin, made publicly available in 2009, began its rise https://www.xcritical.com/ to popularity around 2010 when the price for one token rose from fractions of a dollar to $0.09. Since then, its price has increased by tens of thousands of dollars—sometimes rising or falling thousands of dollars within days.

Most assets will offer a comprehensive set of derivatives and other ways of hedging or leveraging a position. However, Bitcoin derivatives products are only in their infancy, further constraining the ways investor exposure to Bitcoin can be managed. As these derivative products evolve and mature, they will help smooth Bitcoin volatility. Markets are made up of acting individuals, and a large group of those individuals now see value in bitcoin and have therefore acted on that belief by buying bitcoin. But that group did not all come to that belief at the same time, nor in the same way. Each individual had to go through the process of understanding bitcoin and its value proposition.

Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency. China’s government and central bank announced in 2021 that all cryptocurrency transactions or facilitation were illegal.

Small Market Capitalization

Thousands of different cryptocurrencies exist, with new projects and tokens launching every day. However, when competition becomes too intense, it can lead to a decrease in prices by driving down the value of all cryptocurrencies, including Bitcoin and Ethereum. Before you decide whether you want to invest in crypto, you need to know if you’re up for a bumpy ride. Can you imagine losing 30% of what you have in your bank account in one day?

Please note, however, that simple overlays or comparisons of charts should never be used as any kind of model or indicator. We are only emphasizing here a historical example of an emerging asset class that had very volatile periods as it went through its own price discovery process. Furthermore, as a hypothetical let’s say there were two very different asset class choices. The first has very low volatility but is not expected to preserve value in terms of purchasing power. The second has incredibly high volatility but is believed to possess the ability to store value.

Why is crypto so volatile now

Arguably, Bitcoin could be the coin that led the government, the public, and traditional financial services companies to take cryptocurrencies seriously. Increasingly, millions of ordinary people view Bitcoin as a vehicle for investing, trading, and saving. But before investing in cryptocurrency, an investor would want to consider its volatility seriously.

However, over time, as these markets matured and gained wider acceptance, their volatility gradually decreased, and they evolved into more stable and established investment vehicles. Likewise, as adoption and awareness grows around cryptocurrencies, it is likely to stay stable and less prone to volatility. Volatility is essentially a given across all types of cryptocurrencies, given the general air of legal, political, institutional, and technological uncertainty that floats around them. Not only is it the most expensive crypto, but likely the most visible, and has become a flagship for the entire crypto/blockchain space.

Bitcoin in the News

Supply and demand influence the prices of most commodities more than any other factor. Bitcoin’s market value is primarily affected by how many coins are in circulation and how much people are willing to pay. By design, the cryptocurrency is limited to 21 million coins—the closer the circulating supply gets to this limit, the higher prices are likely to climb.

  • Having the value of your investments be at the whim of one person’s fickle opinion sounds like a huge risk to me.
  • It’s important to note that while volatility may pose challenges, it is an inherent characteristic of emerging and disruptive markets.
  • Venture capital funding can help seed new start-ups and advance technical innovation.
  • The second has incredibly high volatility but is believed to possess the ability to store value.
  • Crypto experts consider that in the overall portfolio, investors should just look at investing just the 5% exposure to cryptocurrencies.

As the amount of available coins increases, however, the price of those coins will drop because more people will have the incentive to buy them, and more of them will be willing to sell them. Thus, the market becomes more competitive, and prices may drop as a result. Crypto is a high-risk and high-return investment asset class, and trading it requires a lot of analysis and understanding crypto volatility tracker of the underlying technology and market drivers. Investing in something that is speculative is a guaranteed way to introduce volatility in your portfolio. It means the investment’s value isn’t very grounded, which makes its price incredibly sensitive to even slight changes in investors’ expectations or perceptions. The current volume in the digital crypto market stands at $41.21 billion.

Up until 1971, gold had in various forms been money or at a minimum tied or anchored to the U.S. dollar, such that there was a hard peg of gold to a certain amount of U.S. dollars. Ultimately, only time will tell if cryptocurrencies will ever reach their full potential as a global currency and payment method or whether the technology underlying them will be relegated to a technological dead end. For example, Vox cites a fascinating graphic on “The Musk Effect,” or the phenomenon of how strongly the value of Bitcoin is affected by Elon Musk’s tweets. If it makes you nervous that one person’s Twitter account has a huge influence over the value of your investments, good. Having the value of your investments be at the whim of one person’s fickle opinion sounds like a huge risk to me.

Exploring the Economics of Blockchain Gaming – Star Atlas

However, sometimes volatility can benefit a new fast-growing asset, like crypto. In financial markets, liquidity is a concept that relates how much a given purchase or sale of an asset will move its overall price. Say you have an item that costs $500 but when you go to sell it, there’s no one to buy it; In that case, the $500 price tag is not very meaningful. To get these screaming vertical price increases, there needs to be some death-defying falls as well. Bitcoin’s very volatility makes this popular crypto a tempting investment for some, and a quite dangerous one for others.

The second asset class would be the correct choice for the investor because it is the one that has the better chance of fulfilling the investment objective of preserving value over the specified time horizon. Volatility, despite being undesired, is not part of the objective and does not matter over the 10 years. What matters is whether the objective has been achieved at the end of the ten years, not necessarily achieved at all times throughout the 10-year time period.

With restaurant chains, online stores gradually warming up to the idea, the coins are likely to grow. Rather, it’s a phenomenon that exists in all financial markets for a mix of reasons. Cryptocurrency skeptics might see crypto’s volatility as a danger sign, a reason to stay away.

Manage Your Money

“A rise in demand cannot result in the increase in supply of bitcoin or increase the speed at which bitcoin is issued,” wrote Ria Bhutoria, former director of research for Fidelity Digital Assets. New bitcoin are created as a reward for miners, who contribute their computing power to verifying transactions across the decentralized network. Over time, the size of these rewards decreases, so each new completed block earns miners less than it used to.

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