Why is the crypto market so volatile?

Highlights

• The term "volatility" refers to price fluctuations in an asset.
• Many people equate "extreme volatility" with market loss, uncertainty, and turmoil.
• Traders and investors may put more bets forecasting ongoing swings when markets swing between extreme lows and highs, resulting in increased price volatility.

The term "volatility" refers to price fluctuations in an asset. Sometimes, the price change becomes too dramatic, with sharp price swings in a short period of time. This is referred to as "extreme volatility”.

In this article, we have tried to explain the crypto market volatility to aid investors make the correct choices regarding their investments.

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In crypto industry, a brief check at past price charts reveals that depressing troughs and exploding peaks occur at a faster rate in crypto pricing.

For example, the Bitcoin price went up by 125% in 2016, and by more than 2,000% in 2017. Bitcoin's price has dropped after reaching fresh an all-time highs in 2017. Bitcoin again experienced two record highs in 2021, with all-time high recorded in November 2021. Since the beginning of 2022, Bitcoin has been trading at a low in comparison to other cryptocurrencies.

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What leads to crypto prices’ volatility?

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Nascent Market

Cryptocurrency is still a growing sector, with a lot of hype as well as disillusionment among investors. Despite all the press coverage, this market is still trivial in comparison to gold or traditional currencies. The group of people holding big sums of cryptocurrency can easily influence the market through big selloffs.

Speculation

Speculation is the lifeblood of the cryptocurrency industry. To make money, investors wager whether prices will fall or rise. These speculative bets result in significant price volatility.

The majority of cryptocurrencies, such as Ether and Bitcoin, are digital assets with no tangible money or commodity backing. It means that their price is assessed by the principles of demand and supply. Hence, any market development can create a supply-demand gap, and influence the price.

Driven by Technology

The blockchain and other alternative technologies that these coins are based on are still in early stages of development. Whenever a new technology is introduced or a coin gets upgraded, there is a huge impact seen on the price of a coin.

Novice Investors

The crypto market, unlike the stock market or real estate, attracts new investors who want to enter the crypto market to make quick profits. However, when profits are not made, the rookies withdraw their funds from the market, impacting market performance.

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Final thoughts

Crypto market is extremely volatile. Hence, an investor should invest in the crypto market with caution and after conducting thorough research. Also, one should invest as much as one can afford to lose. Instead of expecting to reach a certain level of success overnight, one should take a more gradual approach to the cryptocurrency market.

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