One of the main factors contributing to crypto price swings is speculation and hype. When a new cryptocurrency launches, it typically experiences an initial spike of excitement as people hear about it for the first time. This often causes people to rush to buy and sell the new coin, which drives up the price to unsustainable levels. That’s why cryptocurrencies that have a lot of coins in circulation experience lower prices than cryptocurrencies that don’t have as many coins in circulation. This is because when there are more coins on the market , the price goes down, and this is one of the reasons Dogecoin is unlikely to ever reach $1. This applies not only to cryptocurrencies but also to stocks and other financial instruments.

A key insight of Markowitz’s work was that it is not necessary to have negative correlation between assets to benefit from diversification; there can be benefits even with weak positive correlation. Table 2 shows the correlation matrix for all of the assets, with higher correlations shaded in green and lower correlations in red. Figure 2 shows volatility relative to that of SPY for BTC, AAPL, GLD, and the Euro over the one-year period from September 2021-August 2022. A value of 1 means that the given asset’s standard deviation was equal to that of SPY.

What makes crypto volatile?

As such, it is a reasonably stable commodity, as far as price, demand, and supply go. They are fast and secure modes of transactions that are not prone to any government control or interference. At the time of writing, the global crypto market cap is $1.2 Trillion, a -39% change from 2021. In traditional financial markets, volatility is the measure of the dispersion of the asset’s price over a period of time. Generally, the higher the volatility, the riskier it is to invest in that asset.

As the most popular cryptocurrency, Bitcoin demand increases because supply is becoming more limited. Long-term, wealthier investors hold their Bitcoins, preventing those with fewer assets from gaining exposure. According to the National Bureau of Economic Research, one-third of all Bitcoins were held by the top 10,000 investors at the end of 2020. https://www.skopies.net/teleti-orkomosias-gynaikon-symvasiouchon-opliton-5is-ekpaideftikis-seiras/ Full BioNathan Reiff has been writing expert articles and news about financial topics such as investing and trading, cryptocurrency, ETFs, and alternative investments on Investopedia since 2016. They usually have huge amounts of crypto and money at stake and can move the market significantly by buying or selling large amounts of cryptos.

But in a reflection of a challenging bear market, MicroStrategy snapped up just 301 BTC in the most recent quarter — a stark contrast to the 9,000 BTC it bought a year ago. Bitcoin — the first cryptocurrency to be created — is considered extremely volatile. The recent lack of volatility has prompted many to ask whether Bitcoin has found a floor around its current price. Comparing the relative trading volumes between the 2018 drawdown and today gives a more comprehensive picture. I have no business relationship with any company whose stock is mentioned in this article.

What causes cryptocurrency to go up and down?

The interactive chart below provides one way to visualize this day-to-day volatility—the daily percentage increase or decrease in price in U.S. dollars from the previous day. Despite much public discussion about cryptocurrencies as speculative investments or world-changing technology, their success ultimately hinges on widespread adoption as currencies—including as a medium of exchange. Day-to-day volatility creates exchange rate risk over short periods of time. This creates problems for a currency’s usefulness as a medium of exchange if one or both parties to the transaction need to quickly move their money into a different currency. Either the buyer or seller, or both, must take this exchange rate risk, increasing the transaction cost and, ultimately, the price. In the wake of the most recent downturn, critics have doubled down on this point.

Media outlets, influencers, opinionated industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations. The long-term cryptocurrency investor can take advantage of these price declines and use the opportunity to increase holdings. While price is an important metric for traders and speculators, it can prove to be a detrimental factor for long-term believers and investors. Investing in something that is speculative is a guaranteed way to introduce volatility in your portfolio. It means the investment’s value isn’t very grounded, which makes its price incredibly sensitive to even slight changes in investors’ expectations or perceptions. Kate is a full-time web3 writer who has been involved in the cryptocurrency and blockchain space since early 2017.

How crypto may affect investing goals

Volatility can not only cause short-term losses/gains but also impact highs and lows over the long term. Below, we’ll explain what causes cryptocurrency to rise and fall and how these swings can positively or negatively impact potential investors. You can buy Bitcoin on government-approved cryptocurrency exchanges like Coinbase. The 2022 bear market has caused many people in the cryptocurrency industry to question the viability of cryptocurrencies as a whole. To understand the volatility of cryptocurrencies, it’s important to understand how their supply changes as more people buy them and as the mining process continues to produce new coins.

• Universal access, immediate price discovery, and greater transparency also contribute to both the reality and the perception of scams and shady behavior in crypto.
• The IRS also considers Bitcoin a capital asset if it’s used as an investment instrument.
• However, many cryptocurrencies experience their own volatility, like when Litecoin fell following the publication of a fake press release stating Walmart would be accepting payment with LTC.
• Fears of regulation negatively impacting cryptocurrency are one of the many reasons why cryptocurrencies are so volatile.
• The main exception is GLD, which has a lower correlation with every other asset aside from BNB.

Price swings communicate important information to founders and investors, particularly during the crucial adolescent stage of any startup. And restricting price discovery to periodic funding rounds negotiated with a handful of investors can be dangerous. WeWork famously raised money at a $47 billion valuation less than a year before it ended up flirting with bankruptcy; Theranos was valued at $9 billion before going bust. Despite multiple red flags for both companies, there was little price information until the bitter end.

Bitcoin, on the other hand, eschews large central intermediaries by design. Many investors are drawn to assets that garner attention from the media and social media platforms. Oftentimes, individuals will invest in assets based on attention or emotion. Investments into speculative assets should not be influenced by these manias and, instead, should be determined based on fundamentals and long-term conviction.