Why is the crypto market so volatile?

Unlike traditional currencies such as the euro and the British pound, which tend to fluctuate between 0.5% and 1% on a given day, cryptocurrencies show large fluctuations that can sometimes be around 5% to 10% per day. This volatility is important because buying and selling currencies at the right time can lead to big profits for traders. It is not uncommon to see periods of trading where a catalytic event can trigger price swings of around 50% and in some large cases even 200-300%. But why is this asset class more volatile than any other liquid asset in the market? You can read more about cryptocurrencies here .

It's hard to pin down just one reason why cryptocurrencies are so volatile, but let's go over a few contributing factors.

No intrinsic value

Most cryptocurrencies don't sell a product, generate revenue, or employ thousands of people. They usually do not return dividends, and only a small part of the total value of the currency goes into its development. This makes it very difficult to value. How do we know if it is fundamentally overbought or oversold? When is it a good value and when is it overpriced? Without fundamentals on which to base this data, we can only rely on market sentiment, often dictated by media that make money from viewership.

Lack of regulation

The lack of regulation in the cryptocurrency space can affect price volatility. Low regulation enables market manipulation. It is often done by placing orders with the intention of canceling, whereas in regulated markets such as traditional forex markets, placing "fake" orders is illegal. The creation of these false orders can lead to false perceptions of market behavior, which can cause volatility and the addition of false orders to uncertainty.

Supply and demand

Another reason for crypto price volatility comes from simple economics. When demand for an asset grows faster than supply, the price is likely to rise. We have seen this phenomenon particularly clearly with Bitcoin. Demand for Bitcoin has been widespread, and supply has not always kept pace with massive adoption, which has contributed to Bitcoin's strong price increase. Of course, this is not a bad thing from the point of view of those who own Bitcoin, but makes it possible to make big profits if you know how to be on the move at the right time.

Lack of institutional capital

While it's undeniable that some pretty influential venture capital firms, hedge funds, and high-net-worth individuals are both fans and investors in crypto as a segment , the majority of institutional capital remains on the sidelines.

Currently, there has been little movement in the Bitcoin ETF or Mutual Fund, which is predicted to bring much-needed institutional volume to the cryptocurrency market.

Market size

The cryptocurrency market is still a developing market. The total size of the cryptocurrency market has reached more than 250 billion euros and although this is a huge amount, it is a small number compared to the traditional currency market . For this reason, the traditional Currency Market is better able to maintain stability, even if there are large movements in the market. The same cannot be said for the cryptocurrency market. In the cryptocurrency market, a few large traders with a lot of currency (called whales) can change the market by making huge transactions.

When will volatility decrease?

Over time, we can expect more regulation, a more diverse number of investors, and a more mature outlook in the crypto market. We can also expect higher utility value as merchants find more accessible ways to accept cryptocurrencies, and the technology behind transactions improves as well. While volatility may decrease, we can also expect a gradual but steady increase in the overall value of the cryptocurrency market. Just as the stock market has given way to long-term holders, the cryptocurrency market will probably do the same.