Why Cryptocurrency Is So Volatile (And How to Use It to Your Advantage)
In short: There are many reasons why cryptocurrencies are so volatile, many of which are huge opportunities.
Cryptocurrencies have attracted a lot of attention in recent years, but one of their most notable characteristics is their high volatility.
In this brief guide, we’ll explore the key factors that contribute to cryptocurrency volatility.
### 1. Developing Market
Despite the growing popularity of cryptocurrencies, the cryptocurrency market is still relatively small compared to traditional financial markets such as the gold market (valued at $7.9 trillion) and the U.S. stock market (valued at $93.7 trillion). Cryptocurrency markets are smaller and more susceptible to significant price fluctuations caused by unimportant factors.
Opportunity: We see cryptocurrency eventually becoming a $10 trillion market. And further out, we also foresee it becoming a $10 trillion market beyond most analysts’ wildest expectations. It’s not a guarantee, but if it happens, you’ll look back at today — with a market cap of about $2.5 trillion — and be glad you participated.
### 2. Security Vulnerabilities
Cryptocurrency exchanges and platforms are often the target of hacker attacks, resulting in security breaches and fund losses. These incidents can trigger investor panic, leading to sell-offs and price drops.
For example, in 2017, South Korean Bitcoin exchange Youbit suffered losses of up to 17%, leading the company to declare bankruptcy and spreading panic among investors.
Opportunities: We always keep a close eye on cryptocurrency projects that can help stop hackers. For example, some blockchains are working towards the goal of being “bot-free”. In the age of AI, this is a big deal and provides a huge opportunity for investors to succeed and take market share in the DeFi market.
### 3. Market speculation
Speculative trading is one of the biggest contributors to cryptocurrency volatility. Traders often try to predict price movements and buy or sell accordingly to make a quick profit. This speculative activity can exacerbate the volatility that already exists in the market itself, as traders constantly try to predict the rise and fall of cryptocurrency prices.
Opportunities: While we are long-term investors, there are short-term opportunities in the market. We don’t recommend participating in purely speculative crazes like meme tokens, but one of the most interesting blockchains right now is BASE, Coinbase’s public blockchain. (This is also why we like Optimism, as BASE is built on it.)
### 4. Regulatory uncertainty
A lack of clear regulations and different approaches by governments around the world can also contribute to volatility in the cryptocurrency market.
Uncertainty about the legal status of cryptocurrencies and the possibility of future regulation could cause investors to become cautious, leading to price volatility.
Opportunities: Regulatory clarity will be a major driver of mass adoption. If you thought Blackstone’s entry into the tokenized securities space was a huge move, wait and see until the government lays out a clear framework. Then, the race is on.
### 5. Media coverage and public perception
Media coverage and public perception can have a significant impact on cryptocurrency prices. Positive news and increased adoption can drive prices higher, while negative news, such as reports of scams or hacks, can lead to sell-offs and price drops.
Opportunities: The media is fickle, so this is a difficult puzzle to crack consistently. One approach is to look for future catalysts (like the halving) and position yourself accordingly before the mainstream media starts discussing it. We always take this into account when trying to find new coins.
### 6. Limited Use
Although the potential applications of cryptocurrencies and blockchain technology are vast, current use cases are still limited compared to future potential. As a result, their value is driven primarily by speculation rather than real utility, which exacerbates their volatility.
Opportunities: As the cryptocurrency market matures and more widespread adoption occurs, we bet all of these factors will abate, leading to more stable prices — and higher prices than they are today.