Crypto Is Volatile — But Why?

Over the years, cryptocurrency volatility has been a prominent aspect of the asset class that has made or destroyed many investors. This has piqued the interest of those who are curious about what influences volatility.

Cryptocurrencies can be traded, making them analogous to stocks, commodities, and securities. The price at which they trade is determined by the market's demand and supply, and the connection between the two typically determines any change.

Think about the financial markets. They are influenced by macroeconomic variables such as interest rates, inflation, and monetary policy. Furthermore, industry-related developments as well as national or worldwide events have an impact. The same holds true for crypto.

According to Jacob Sansbury, CEO of trading platform Pluto, digital asset markets can expect to witness significant volatility for some time.

Consider the stock values of the major Web2 companies, such as Amazon. In their early years, they witnessed significant price increases and decreases. They have risen in price several times in the last few decades, only to fall by as much as 90%.

This is due to the fact that any novel technology will almost certainly see exponential rates of adoption. The same may be said for Bitcoin, Ethereum, Solana, and other blockchain networks.

“The difference with digital assets is that their pace of adoption is much higher than that of most traditional technology companies,” Sansbury noted. “According to some estimations, the rate of growth of digital assets has been twice that of the internet itself.”

“This faster user growth feeds into the boom-bust cycles, as does the reality that digital assets have been driven in large part by retail customers from all over the world.”

Long term, he expects this volatility to lessen, particularly when it comes to large networks like Bitcoin and Ethereum. As more people become acquainted with these networks and become more comfortable with them, the rate of adoption is expected to decline.

“It will take years for this to play out.” “Until then, expect unexpected swings in both directions,” Sansbury added.

Consider distinct asset classes in terms of their respective risk and exposure to external sources while addressing volatility. In the investing world, we would normally classify assets from “most hazardous” to “least risky” as follows: 1. cryptography 2. venture capital 3. public ownership 4. the bond market

According to Simon Schaber, Spool DAO's chief business development officer, central bank intervention has a significant impact on total liquidity across all of these markets.

“If liquidity rises, as we saw with recent strong quantitative easing, it pushes asset classes up like the incoming tide raises a ship in a harbor.” “The most vulnerable asset classes rise the most and the fastest,” he says.

As a result, while more conservative assets grew slowly and real bond yields even turned negative, investors experienced a tremendous boom in crypto, startup capital, and meme stocks.

“When we consider this high level of correlation to the global liquidity situation, as well as the large influence that [venture capital] firms like a16z, Sequoia, Alameda, Jump, and others have over crypto markets, it is easy to understand that high volatility frequently occurs during times of rapid and seismic macroeconomic shifts,” Schaber added.

However, as this market grows, bringing with it less uncertainty, we should see less volatility.

Varun Kumar, CEO of DeFi trading platform Hashflow, revealed when he expects crypto volatility to decrease.

“We will see widespread acceptance when it is evident how exactly crypto can be integrated into the present financial system and traditional financial institutions are ready to implement it,” he said.

To address volatility, he believes that institutions must find a solution for integration, regulators must understand their responsibility, and the general people must regard cryptocurrency as more than a trading opportunity.

Cryptocurrency values have also dropped in response to negative regulatory or geopolitical developments, such as China tightening its grip on the asset class and Russia's invasion of Ukraine. They've also tended to mimic stock market movements, showing a relationship between crypto and other traditional assets.

Aside from these reasons, Chris Esparza, CEO and founder of Vault Finance, claimed that values of new digital assets with a relatively tiny market cap can be readily manipulated with a considerable quantity of capital.

“With many traders positioning themselves to profit from these market swings, several compensate by injecting cash.” However, when market capitalization grows, volatility tends to fall, he says.

He offered bitcoin as an example, noting that it is less volatile than ether in general, and that price offset is almost impossible due to the bigger market cap.

“With more assets moving into the crypto ecosystem from retail and institutional investors, there will be more balance and less volatility over time,” he said, adding that, while the time frame is impossible to estimate, a less volatile crypto ecosystem may be expected in roughly five years.

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