Cryptocurrencies are known for their extreme price swings. A drop or surge of 10% in a single day is nothing unusual, while the same kind of movement in the stock market would be considered a crisis. But what makes crypto so unpredictable? While many investors accept volatility as part of the game, few understand the reasons behind it.
Table of Contents
1. Crypto Markets Never Close
Unlike traditional stock markets, which operate during set hours and close on weekends, cryptocurrency trading runs 24/7. This means there are no forced pauses that allow investors to digest economic news or geopolitical events before making trading decisions. Any major development – whether it’s a government policy change, a security breach, or a sudden spike in demand – immediately reflects in the price.
This was evident in April 2024, when geopolitical tensions between Israel and Iran escalated over the weekend. While stock markets were closed, crypto was the only market open, and traders reacted in real time. Panic selling led to a sharp drop in prices, but by Monday, when stock markets opened, the situation had already de-escalated, minimizing the impact on traditional assets. This kind of immediate response mechanism fuels volatility, as investors have no cooling-off period to reassess their moves.
2. No Clear Benchmark for Valuation
With stocks, investors can rely on earnings reports, business fundamentals, and industry comparisons to assess a company’s value. Cryptocurrencies lack these traditional benchmarks. There are no cash flows, balance sheets, or physical assets that provide a reference point for what a particular token should be worth.
Instead, crypto prices are largely dictated by market sentiment, speculation, and adoption trends. Without a fundamental anchor, it’s difficult to determine if a coin is overpriced, underpriced, or at fair value. A sudden wave of optimism or fear can lead to rapid price swings in either direction, and without a fundamental valuation model, no one really knows where the “correct” price should be.
3. Speculation Plays a Bigger Role
Speculation is a factor in all financial markets, but in crypto, it dominates. Many traders enter the market purely based on hype, momentum, and social media trends rather than any long-term belief in a coin’s utility.
This is especially evident with memecoins and newer, smaller altcoins, which often experience massive spikes driven by excitement, only to crash just as quickly when the enthusiasm fades. A single tweet from a high-profile figure can send a cryptocurrency soaring or crashing within minutes. Since these speculative movements are often driven by retail investors rather than institutions, they tend to be more emotional and less predictable.
4. Smaller Market Size Means Bigger Swings
Compared to traditional asset classes, most cryptocurrencies have a relatively low market capitalization. While Bitcoin has grown into a two-trillion-dollar asset, many other cryptocurrencies remain small enough that a relatively modest amount of capital can significantly move the price.
For smaller tokens, a single whale investor selling a large position can cause the price to crash, triggering panic among other traders. Similarly, a sudden growth of buying pressure can create massive spikes, as there isn’t enough liquidity to absorb the demand smoothly. This low liquidity amplifies volatility, making cryptocurrencies far more susceptible to sharp movements than large-cap stocks.
5. Limited Institutional Presence
Institutional investors help stabilize traditional markets by providing steady liquidity and reducing emotional trading. In crypto, however, institutional participation is still relatively low, particularly outside of Bitcoin and Ethereum. This means that the market is largely driven by retail traders, who tend to make decisions based on emotion, hype, and short-term gains rather than long-term fundamentals.
Retail-driven markets are much more volatile because they lack the stability provided by large financial institutions. While institutional involvement in crypto has been growing – especially with the launch of Bitcoin ETFs – many cryptocurrencies still lack the deep institutional backing that traditional markets rely on.
6. A Young and Evolving Market
Cryptocurrencies are still in their early stages compared to other financial assets. The market is rapidly evolving, with new projects, technologies, and regulations constantly reshaping the landscape. This uncertainty adds to the volatility, as traders react to both positive and negative news with strong price movements.
As the industry matures and more institutional investors enter the space, volatility should gradually decrease. However, for now, crypto remains a highly reactive market where sentiment can shift in an instant, leading to dramatic price swings.
Why Bitcoin Is More Stable Than the Rest
Not all cryptocurrencies are equally volatile. In recent months, Bitcoin has shown more price stability compared to smaller coins. There are several reasons for this.
First, Bitcoin has a much larger market cap, meaning it takes significantly more money to move its price. It also has a high level of institutional adoption, with hedge funds, corporations, and even some governments holding Bitcoin as part of their reserves.
Additionally, Bitcoin benefits from a strong base of long-term holders, following a “HODL” strategy and not selling during short-term price swings. This reduces the impact of panic selling and speculative trading, making Bitcoin less prone to extreme volatility compared to smaller cryptocurrencies.
Can market belief shape reality? If enough investors expect a cryptocurrency to rise, their actions might actually make it happen. We explained how self-fulfilling prophecies impact crypto prices in this article.
