Navigating the complexities of finance can feel like decoding an ancient manuscript with one of the most common words used in it being volatility. So why is Bitcoin so volatile? Is it because there’s something fundamentally wrong with it? Does it have a flaw that other cryptocurrencies or stocks don’t have?
No. In fact, it’s mostly got nothing to do with Bitcoin per say, it’s simply due to the fact that it’s a very new asset class that has relatively low liquidity compared to other massive and more mature markets like stocks or bonds.
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What Is Price Volatility?
Price volatility in the financial markets refers to how much of an increase or decrease an asset has over time. For example, if one asset goes up 100% then down 200% it would be considered more volatile than another asset that only went up 10% and then down 20%.
While volatility measurements can be applied to many things, for this piece we’re mainly interested in the price volatility, or how much an assets market price goes up or down. Higher volatility also usually results in that particular asset being more riskier for the investor. While this means they can get better returns, it also means they can suffer worse losses too.
Crypto Volatility Vs Regular Market Volatility
In traditional financial markets such as the stock market, its common for the trading of shares to be “halted” sometimes when there’s extreme volatility detected due to too many investors buying or selling that particular share.
The share is temporarily halted and it’s no longer possible for investors to buy or sell those specific shares for the rest of the day. As cryptocurrency markets operate world wide and in thousands of different exchanges – some fully decentralized like Bisq – it’s impossible to halt trading.
This means that if digital currencies are going up or down, it’s entirely up to the free market to stop it. There’s no central authority to stop a huge crashing market or put the breaks on digital assets going to the Moon, even if this increase in price makes zero logical sense.
| Year | Start | End | Return |
|---|---|---|---|
| 2009 | $0 | $0 | 0% |
| 2010 | $0.0025 | $0.10 | 3,900% |
| 2011 | $1 | $30 | 2,900% |
| 2012 | $5.31 | $14 | 164% |
| 2013 | $20 | $755 | 3,675% |
| 2014 | $767 | $317 | -59% |
| 2015 | $314 | $431 | 37% |
| 2016 | $434 | $960 | 121% |
| 2017 | $998 | $14,839 | 1,387% |
| 2018 | $14,093 | $3,809 | -73% |
| 2019 | $3,692 | $7,240 | 96% |
| 2020 | $7,244 | $28,837 | 298% |
| 2021 | $28,665 | $48,022 | 67% |
| 2022 | $48,082 | $16,540 | -66% |
| 2023 | $16,541 | $42,208 | 155% |
| 2024 | $42,208 |
While there are some valid arguments to be had regarding traditional markets and these types of “safe guards”, it inherently means that it’s not longer a truly free market. Someone has the ability to stop or start the market at whatever times they see fit, which of course could be manipulated to their own advantage.
Crypto and mainstream markets operate on very similar rules, but with many unique differences like described above. This means that if you as an investor want to buy bitcoin or other coins, you need to be aware of these differences and how they’ll affect your investment.
Why Is Bitcoin So Volatile?
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