Investing Beginner

Why are Crypto Prices So Volatile?

Reading Time: 5 minutes

Those who are seeing crypto asset price movements for the first time may be surprised by the sharp price fluctuations. Because of the extreme volatility of cryptocurrency prices, new investors may be hesitant to invest. However, price fluctuations are also the reason why a lot of people invest in crypto, as they can benefit from the extreme price swings. Check out the following article for an explanation of the reasons for the volatile price swings of crypto assets.

Article Summary

  • ⌚ The crypto market is open 24 hours a day, seven days a week, and is not governed by a government or central bank. It makes the price fluctuations solely based on the result of market decisions.
  • 📊 The price of crypto fluctuates due to supply and demand, investor and user sentiment, government regulations, and the development of crypto technology itself.

Why is Crypto Price so Volatile?

Various reasons and factors can lead to the increase and decrease in the price of crypto assets. Here are some reasons why crypto prices can be volatile

The Crypto market is open 24/7

Why are Crypto Prices So Volatile?

Unlike the stock market, the crypto asset market is open 24×7 throughout the year without any breaks. In addition, the crypto market also knows no geographical boundaries. That being said, it makes crypto assets tradable with every currency worldwide. For example, there are markets for BTC/USD, ETH/IDR, BNB/EUR, and many more.

Since anyone can be a seller and a buyer, transactions can be made anytime and anywhere. As a result, with the high level of transactions and buying and selling, the price of crypto assets constantly fluctuates.

The Effect of Crypto Distribution

As with any asset class, there will always be investors who hold more certain assets than others. In the crypto world, these investors can come from investors who have been mining from an early age, accumulating crypto from a long time ago, to high net worth and institutional investors. This group of investors can also be called whales because they have more coins than the average investors.

The decisions of these whales have a significant role in influencing the ups and downs of crypto asset prices. If these whales decide to profit by selling their coins, the price of the crypto could decrease. This is because the market cannot absorb all the recently released coins. Often, the decision of whales to sell their crypto assets will trigger a sell-off from retail investors. This panic and massive sell-off will trigger a deeper decline in prices.

On the contrary, when whale investors decide to buy crypto assets, their actions can grow the confidence of other investors. This will lead to massive buying action, allowing the price of crypto to continue to increase. This dynamic then contributes to the unstable price of crypto.

You can find out the characteristics of institutional investors in crypto assets through the following article.

Crypto Assets Inflation

Some crypto assets have a predetermined inflation rate. One example is Bitcoin. With the Proof-of-Work (PoW) mechanism, new Bitcoins will enter the market after being successfully mined by the miners. This is inseparable from the need for miners to sell these coins to fund their operational costs.

However, the amount of Bitcoin sold will vary according to each miner’s needs. If the number of new coins that enter the market exceeds the demand, it can cause a price decrease. On the other hand, if the number of new coins entering the market is less than the existing demand, it can cause a price increase. Ultimately, it will always make the price of Bitcoin and several other crypto assets move up and down.

Market Sentiments

In essence, the movement of crypto assets is inseparable from the sentiment on the market. Coverage in the mass media has a role in the movement of crypto asset prices. When crypto assets receive positive attention and coverage from the mass media, crypto’s reputation will increase. Ultimately this can boost investor confidence and interest in crypto assets. As mentioned before, the price will also increase when the demand goes up.

The opposite also applies. When the crypto industry or one particular crypto asset gets negative news, its reputation will be tarnished. This could raise doubts and concerns among investors, leading to a sell-off. When there is a massive sell-off, the supply will increase. Ultimately, this will drive the price of the crypto down.

The dynamics of market perception can be reflected in the fear and greed index, you can read the explanation in the following article.

Not only the mass media, the legal and political system can also change the way people see crypto assets. Especially when the state acts aggressively towards crypto assets. For example, China, Turkey, and Nigeria’s decision to tighten regulations related to crypto assets. It had a negative impact. The public is worried about the regulation, and this sentiment is ultimately pushing down the crypto price. Meanwhile, on the other hand, El Salvador’s pro attitude towards adopting Bitcoin as a means of payment in his country has generated positive sentiment in the market.

If the legal structure changes, so do the flow of capital. If there is one country that acts aggressively, then the flow of funds will come out of countries that are not friendly to the crypto industry. This will naturally affect the price of the crypto as investors question the future of the asset with the new regulations in place. Inevitably, the attitude and regulation of a country towards crypto assets are factors that make the price unstable.

Crypto Market is Not Controlled by Any Party

In traditional asset markets such as stocks or bonds, the government or central bank can intervene as the final buyer. The government and the central bank can ensure that prices will not fall beyond the agreed limits. However, this is not the case with crypto assets. Only the market can absorb the supply on various exchanges when the crypto price falls.

The price will drop if the sold coin exceeds the daily buying volume. On the other hand, if the supply in the market is less than the daily volume, then the price increases because there are fewer sellers.

Leverage and Derivatives Trading

The volatility of crypto assets may put the average investor in doubt. But, for those who wish to speculate, crypto can be an attractive asset to trade for short-term gains. Believe it or not, for some traders, the price movements of crypto assets are not volatile enough. As a result, they prefer to borrow crypto assets, also known as leverage.

These traders would use the borrowed crypto assets to make bigger bets on the market. This is a derivative trading model, and it carries a high risk. If the bet does not go as expected, the trader will be liquidated, forcing them to close the position. This can create a dominos effect that pushes the crypto price up or down depending on how many bets are placed on the secondary market.

If you are interested in investing in crypto assets, don’t forget to read the following article.

Start Investing at Pintu

After knowing the reasons behind the volatility of crypto asset prices, are you interested in investing in crypto assets? Through Pintu, you can invest in various crypto assets such as BTC, BNB, ETH, and others safely and easily.

Pintu is also compatible with popular wallets such as Metamask to facilitate your transactions. Download Pintu app on Play Store and App Store! Your security is guaranteed because Pintu is regulated and supervised by Bappebti and Kominfo.

Besides making transactions, in the Pintu Apps, you can also learn more about crypto through various Pintu Academy articles which are updated every week! All Pintu Academy articles are made for knowledge and educational purposes, not as a financial advice.

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