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This is twice the impact of the UK voting to leave the European Union on the British pound. Meanwhile, his tweeting one word, Doge, drove the value of Dogecoin up by nearly 18% in an hour. Cryptocurrencies, NFTs and other blockchain platforms have traditionally been a young person’s game. For many investors, and particularly early adopters of crypto, cryptocurrencies have been their introduction to the world of investing, speculation and financial planning. This has been for a number of reasons, key amongst which is accessibility. Until the rise of app-based investing, with challenger financial service providers such as Revolut, engaging with the stock market has been too expensive and crypto volatility too slow for the young investor.

Market Speculation and Investor Behavior

In May 2021, for instance, bitcoin https://www.xcritical.com/ prices plunged by more than half; over the past month, however, they’ve rallied by more than 40%. Retail investors who enter the crypto trading world may not always be so lucky thanks to high volatility. Knowing what causes crypto volatility is the first step in maneuvering the inevitable ups and downs.

• The influx of institutional investors, each with their strategies and thresholds for buying and selling, further complicates prediction models.
• At that moment, most funds that had crypto on their balance sheets started selling it.
• Speculation and market manipulation are rife when it comes to this digital currency.
• This is similar to a reduction in corn supply if harvests were to be reduced every four years until no more was harvested, and it was publicly advertised that it would happen—corn prices would skyrocket.
• Different from traditional physical assets like gold or silver, crypto doesn’t have intrinsic value, meaning its worth is only based on how much people are willing to pay for it.
• High volatility is indicated by larger and more frequent price movements, while the opposite holds true for low volatility.

Key reasons for crypto volatility

It takes unique instances of long bear markets to get seller energy to this point. These are rare occurrences that have only happened twice in bitcoin’s history, 2013 and 2017, before this current instance. Once a new all-time high in price is reached in this environment, we observe a phenomenon which we are calling a “green cross” and can be Non-fungible token seen as a bullish signal of pent-up energy. Here are the three instances of a green cross and how price responded over the next 12 months and at its peak. This is reflected in the chart below by a rise in seller energy above the 95th percentile in particularly critical moments. Bitcoin’s one-year realized volatility becomes particularly noteworthy when it reaches new all-time lows.

#2. Supply & Demand Aren’t Managed

Seller energy helps us take a closer look at investor sentiment by taking the percentage of addresses in profit and dividing by one-year realized volatility. (Note that we use percentage of addresses and not total bitcoin supply because this brings the metric closer to the individual level.) This adds an investor lens to volatility that otherwise would not be there. What we find when doing this is that seller energy has historically been above its 95th percentile at the beginning of bull markets. Historically, low volatility has typically occurred at the end of long bear markets after all the selling has been exhausted and seller energy is low.

Before you start the investment journey, invest only the money you’re willing to lose so that you can focus on your long-term goals and avoid making impulsive decisions. To effectively HODL, you must grasp the importance of dollar-cost averaging, which involves investing the same amount of money at regular intervals. A good store of value should not have a very short lifespan, like flowers or milk. It should also be liquid, which measures how easy or difficult it is to exchange. Unlike stocks and commodities, which have decades or even centuries of historical data to draw upon, Bitcoin has just over a decade.

Analyzing these trends can provide insights into what drives Bitcoin’s volatility and offer some predictive understanding of future movements. Announcements of regulatory crackdowns in major markets like China and South Korea have led to significant price drops. The global regulatory landscape still needs to be more comprehensive and uncertain. Another factor contributing to Bitcoin’s volatility is the influence of large-scale investors, often called whales, who hold substantial amounts of it.

Still, crypto is an emerging market that’s creating a space for itself in the world, with countries legalizing it and companies integrating blockchain technology into their payment processes. The main reason for this was increased awareness of and capabilities for alternative coins. For example, Ethereum has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) applications. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether (ETH), the cryptocurrency used to pay fees for transactions on its network. Ethereum accounts for about 14% of the overall market cap of cryptocurrency markets. And without wider acceptance of bitcoin as a currency, its value seems to largely hinge on speculation and market sentiment, rather than intrinsic value.

Business people, financial experts, and even celebrities are all sharing their opinion about crypto or even promoting it. Bitcoin can make you rich overnight, but in a couple of days, you can lose a significant part of your investment. That’s because the first cryptocurrency is very volatile – it rises sharply and then falls just as quickly. In this article, you will discover what are the reasons for such sharp fluctuations and whether volatility is always a bad thing. Bitcoin has always been known for its high volatility, sometimes rising or dropping thousands of dollars within a couple of hours. Find out what drives bitcoin’s dramatic price changes and whether it’s safe to buy the dip.

Before we explore different factors that are making cryptocurrencies volatile, it’s very good to get to know the different players in this market. In today’s world, cryptocurrency markets are attractive for investing and trading, and new coins are emerging daily, some of them become valuable, and others remain at the level that they were created. The influx of institutional investors, each with their strategies and thresholds for buying and selling, further complicates prediction models.

Reacting very fast by the diverse players in the cryptocurrency market are one of the reasons that cryptocurrency market prices are very volatile. Digital currency market volatility presents investors with opportunities and risks, so it’s paramount to understand the forces behind Bitcoin price fluctuations to make sound investment decisions. The limited historical context makes applying time-tested models based on long-term data easier.

One of the most important reasons that cryptocurrencies are so volatile is the decentralized nature of this market. One of the features that cryptocurrencies have in common is their volatility, their prices are changing rapidly, and this change can be even within hours or days. Exchange and wallet security must be guaranteed to keep investor confidence. The Mt. Gox breach, which resulted in the loss of roughly 850,000 Bitcoins, is among the most well-known incidents in Bitcoin history. At the time, Mt. Gox, the largest Bitcoin exchange, failed due to a hack that caused its price to drop by more than 50%. Regulatory announcements can create uncertainty and affect investor confidence, leading to price volatility.

You not only get paid interest on your deposit, but you can also withdraw your funds anytime. If you agree to lend out your Bitcoin, you can earn interest by depositing your tokens on a blockchain platform. Bitcoin savings accounts offer more favorable interest rates if you lock up your Bitcoin for a while.

Yet, while central banks can reduce the scarcity of fiat currencies at will, Bitcoin’s scarcity is set in stone. There are only 21 million possible Bitcoins, and a not insignificant portion of that is lost forever. The current journey is when technological development continues, and a wider circle of investors values the asset. The beginnings of institutional adoption started to surface, although the expected smaller drawdowns were more significant than anticipated. The most notable example is the Bitcoin Cash Fork in 2017, which created a new currency to improve transaction speed and scalability.