Crypto Volatility Explained: Why Prices Move So Fast

If you’ve considered investing in crypto, then chances are you’ve logged in a few times to check prices. But what happens when the prices seem to shift every few minutes?

Unfortunately, extreme volatility is native to cryptocurrencies because of how they’re designed to work. Read on to learn more about why crypto prices move so fast.

1. Supply and Demand

Cryptocurrencies function on the laws of supply and demand, and unlike fiat currencies, there is no regulatory body to print currency or remove it from circulation to try to help control fluctuations.

The truth is, fiat currency would be as volatile as cryptocurrency without government controls because supply and demand is an inherently volatile model. Demand changes constantly and inconsistently, which causes supply to move in the same volatile patterns.  

2. Lack of Regulation

Of course, that brings us to our second reason for cryptocurrency’s volatility—the lack of oversight and regulation. The reality is, money is volatile. We just live in a world where there are government controls to help dampen the massive market fluctuations.

Cryptocurrency is unregulated, and though governments around the world continue to try to regulate it, we don’t suspect it will happen anytime soon, especially with cryptocurrencies like Bitcoin, which can never truly be regulated.

3. Market is 24/7

Another reason cryptocurrency is so volatile is because the crypto markets are open 24/7. Traditional fiat stock markets have trading hours, meaning you can expect fluctuations during those hours, but then during the evening and at night, prices should hold relatively steady. Even with extended trading hours, most traders don’t use them, meaning any after-hours fluctuations will be small.

Cryptocurrency, on the other hand, can be traded at any time of the day, anywhere. This means there are no hours during which the massive fluctuations happen. Rather, you just have to be prepared for them around the clock. If a massive sale goes through at midnight, then the price will drop then (see supply and demand above!) This can cause many individuals to panic, but we suspect that without trading hours and government controls, stocks would experience the same effects!

4. Cryptocurrency is Still “New”

You may not realize this, but most assets when they are in their infancy are unstable. In the US, new stocks are considered extremely risky, just about as risky as cryptocurrency, because they are “unproven” or the outcome is “unknown.”

So, this means that cryptocurrency could become less volatile with time. In our opinion, that is unlikely due to the previous three reasons for cryptocurrency volatility, but, it is possible that in twenty years, the volatility could lessen a bit.

5. Liquidity is an Issue

One of the lesser-known reasons for cryptocurrency’s volatility is that the liquidity is different than fiat currency. While this is becoming less of an issue as time goes on, it is something that heavily affects the price.

Remember, cryptocurrency is ruled by the laws of supply and demand—therefore, when the supply drops, prices will skyrocket. This can especially be the case with the more popular and stable tokens like BTC—which even though we say “more stable” it is still inherently quite volatile when there is a supply issue.

Liquidity is also a major issue for small and newer tokens, as after launch, they often experience a massive influx of orders, and there isn’t enough supply to go around, causing the price to rise. Of course, when the initial hype dies, the coin crashes again, often costing early investors’ money.

6. Investor Influence

Unfortunately, investors are able to influence cryptocurrency prices in a way that would shock most people who are unaware. While they can do the same thing with fiat investments, because of regulation, they can’t take things nearly as far as they can with crypto.

With cryptocurrency, investors are able to generate artificial hype via celebrities, news articles, and air drops to make a token seem more popular than it is, thus raising the price. While some investors do this just to increase their own stake, some do it so they can sell and make a profit. This is known as a pump and dump scheme, and it is sadly all too common in crypto.

7. Media Coverage

This leads us to another unfortunate aspect, which makes cryptocurrency more volatile—media coverage. To be clear, media coverage affects fiat stocks too, which is why it is so low on this list. Media coverage is the bane of existence for most traders—fiat and crypto.

While media can be great for generating hype in a stock or crypto, it can also create artificial panic about a coming crash or other issue. Sometimes, it can even be used as a scare tactic by companies hoping to “scare” customers in their direction. With crypto, we see less of the latter and more of the former—most companies use media to generate artificial hype, but humans have short attention spans, so when the next new token is launched, the prices of the old one start to decline, creating spikes on the trading chart, indicating volatility.  

8. Misunderstanding

This brings us to our last reason for crypto volatility, and that is the fact that many people don’t understand cryptocurrency. When individuals invest in something they don’t understand, unfortunately, this leads to an increase in negative trading psychologies. Meaning, someone who doesn’t understand that Bitcoin is inherently volatile may panic and sell just because they see a news piece—not realizing it is fake news or that fluctuations are a normal part of cryptocurrency investment.

It might seem weird to you, reading this, realizing that cryptocurrency’s inherent nature is one of its biggest downfalls, but it’s true. People buy crypto expecting it to be similar to how the value of gold changes (spoiler alert: it actually does closely emulate gold), but because they don’t understand how stocks, or even risk, function, they panic and sell at the first indication that they aren’t making a million dollars.

Trust us, volatility is part of investing in cryptocurrency, even if it might not seem like it. So, take the time to learn about crypto before you invest, so you can be prepared for the first big dip.