Why is crypto so volatile? How do crypto price swings fit into the long term market? Will crypto volatility ever change in the future?
Why is crypto so volatile?
Crypto is a speculative asset class (for now), so crypto can move up and down quickly based on news. That can be price trends and charting patterns themselves, social media influence like Elon Musk tweets, government regulation or instances where the crypto protocol itself is changing (i.e. Ethereum 2.0).
Crypto investing has a steep learning curve, and new crypto investors often struggle to make sense of the market. Like all investments, there are two primary psychological factors at work – fear and greed. Learning how to get in before greed peaks and the market tops is vital. Likewise, you can come out on top if you can exit a crypto investment before fear takes hold.
A common market sentiment signal is gauged via the activity of significant holders, otherwise known as whales. Since all the market activity is on-chain, this leads to a situation where whales can manipulate the market. Large private or institutional investors can pump up the price for their benefit and then dump as soon as they get what they want.
Many refer to fear cycles as FUD or fear, uncertainty, and doubt in the crypto community. FUD can come in waves, as seen in the most recent crypto crash of 2021. A combination of regulatory developments, central bank-backed digital currency (CBDC) initiatives, Elon Musk meddling, panicked recent crypto investors and politicians like Trump and Elizabeth Warren calling it a ‘scam’ all came together at once. At the end of the day, crypto is an emerging, nascent technology that inspires both greed and fear. Its newness is perhaps the primary reason why crypto is so volatile.
Sharp crypto price changes don’t have to all be negative. For the well educated and skilful daytraders, the bigger the market swings, the better chances for their wallets to sing. [/learn/trading/day-trading-crypto]
At the moment and for the foreseeable future, crypto volatility is an unavoidable part of our world.
How do crypto price swings fit into the long term market?
Defining a price swing depends on the timeframe. Cryptos like Bitcoin [BTC] and Etherereum [ETH] are no strangers to tacking on more than 1000% or shedding 50% in short order. Traders will look to define trends and trace crypto price movements in a range. For long-term holders (HODLers), price swings matter little. But for traders, price swings represent big opportunities – particularly if they are using leverage. With bitcoin for instance, the crypto has been the best performing risk adjusted asset class of the last few years.
The long-term market trend is upwards as adoption rises, institutional investors seek to enter via ETFs and countries like El Salvador accept it as legal tender. Smart investors may look to buy the dip or time their purchases as FUD kicks in. These investors feel safe as they believe that crypto is here to stay and will take an increasingly prominent role in the global monetary system.
Which raises a crucial question…
Will crypto volatility ever change in the future?
To answer this question, consider a few scenarios.
1: BTC becomes a fully-fledged store of value as a global reserve asset like gold.
2: Crypto reaches a level of adoption that makes it the bedrock of global transactions.
3: Crypto crashes to oblivion due to hyper-regulation.
To reach the lofty goals of our first two scenarios, the market will still have to grow and mature to match the necessary financial value to stop volatility. Michael Saylor for instance, predicts a US$100 trillion BTC market cap. Even a more conservative estimate of BTC reaching a valuation comparable to gold roughly US$11 trillion market-cap would imply bitcoin and other cryptos have a long way to go. Volatility would be inevitable in both these scenarios before reaching a less volatile plateau state. In many ways, investors thinking about the third scenario also keeps the two scenarios from playing out quickly. As a crypto investor, the first two scenarios are the justifications for HODLing strong.