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December 19, 2023

The Ups and Downs of Cryptocurrency: Why Is Crypto So Volatile?

Why Is Crypto So Volatile
Katya Richardson

Written by Katya Richardson

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When you’re thinking about buying cryptocurrency, it’s essential to know not just about the crypto assets, but also about how the whole crypto market works. This includes understanding how often and why the prices change a lot.
Everyone knows that the prices in the crypto market can go up and down very quickly. The reasons for this include supply and demand, investor and user sentiment, media hype, government regulations, and many others.
Most people who invest in crypto know that the prices can move a lot, but not many understand exactly why. This article explains the reasons for the big ups and downs in crypto prices, so investors can know more about the risks and chances they face.

Market Dynamics: Supply, Demand, and Investor Behavior

The struggle between supply and demand greatly affects the price changes and instability of digital assets, with some special aspects because of their unique supply features.

For example, Bitcoin is a key digital asset with a fixed supply of 21 million coins. As the supply gets closer to this limit, its value often rises. This is a typical example of how scarcity increases demand, leading to higher prices.

The situation becomes more intense when big investors, or ‘whales’, enter the market. Their large buying or selling actions can quickly make prices go up or down. For example, if one person holds the world’s fourth-largest Bitcoin wallet and decides to cash out some of their Bitcoin, the price of Bitcoin may change dramatically in the short term.

This impact is even clearer in cryptocurrencies with smaller market sizes. Their lower amount of available trading makes them more affected by these whale transactions, making them generally more unstable and, therefore, riskier.

Why Is Crypto So Volatile

External Influences: Media, Public Figures, and Regulation

Media outlets, driven by the need for engaging content, often highlight predictions from invested parties, influencing the market. For example, the introduction of Proshare’s Bitcoin Strategy ETF in October 2021 saw Bitcoin’s price surge over $69,000, only to fall back to around $50,000 as the initial excitement waned.

Similarly, cryptocurrencies often experience dramatic spikes and crashes due to speculation and hype fueled by influencers. When well-known individuals support or criticise a certain cryptocurrency, this can lead to a noticeable rise in investor interest or a quick sell-off. These events often result in sharp increases in the currency’s value, followed by equally fast drops, as the market reacts to these influential opinions and the speculative trading that follows.

Why Is Crypto So Volatile

In Australia, cryptocurrencies are permitted by law, though they are not classified as legal tender. Their inclusion within the scope of property law and anti-money laundering regulations signifies a growing institutional recognition. Nonetheless, the continual evolution of regulatory guidelines surrounding cryptocurrencies often leads to significant market fluctuations, as investor responses to these regulatory changes are typically swift and impactful.

Technological Progress and Adoption Rates

According to Statista, Australia is at the forefront globally in cryptocurrency adoption, with 25.6% of adults owning digital assets. This includes diverse investment avenues like SMSFs investing in cryptocurrency. This significant uptake, along with the emergence of new technologies in the cryptocurrency sector, greatly influences market volatility.

New technologies such as Decentralised Finance (DeFi), Non-Fungible Tokens (NFTs), and unique digital contracts are continually revolutionising the cryptocurrency landscape. These innovations attract an increasing number of individuals and businesses to the market. When more people get involved in these new types of cryptocurrencies, the market becomes very active. This often causes prices to change quickly and unpredictably.

The combination of Australia’s strong cryptocurrency adoption and the swift development of new crypto technologies is a key factor in the market’s volatility. The introduction of novel crypto products like DeFi and NFTs not only broadens the market’s appeal but also adds to its complexity, resulting in more pronounced shifts in market value.

Conclusion

Volatility presents a significant challenge for investors, but it is the cost paid for the currency’s limited supply and the absence of a central bank to regulate that supply—precisely the characteristics proponents argue confer its value.

Cryptocurrency remains an emergent market, and ‘all investments entail risk, just as shares are subject to fluctuations in price,’ stated Noah Perlman, Chief Operating Officer of Gemini. ‘Bitcoin, though a relatively nascent asset class, ranks as one of the most outstanding performers of the past decade’.

In conclusion, the maxim ‘high risk, high reward’ generally governs investment strategies, a principle that holds particularly true in the realm of cryptocurrency.

The information presented on this website is general information only. It should not be taken as constituting professional advice from the website owner – Hiddup PTY LTD (Hiddup). Any information regarding past performance and returns contained on this website should not be construed or interpreted as a prediction or opinion as to future performance and returns. Hiddup is not a financial adviser. All views and observations expressed by Hiddup on this website are for information purposes only, are general in nature and should not be treated as investment or financial advice of any kind.