Why is the Crypto Market so Volatile?

 

It is often said that the crypto market is more unstable, temperamental, and turbulent than other financial markets. This can be both a good and a bad thing, as the crypto market has successfully made plenty of people richer in a relatively small period of time, but it has also caused a lot of people to lose money faster than they would in other markets such as stocks for FOREX. Here are three major reasons why there is such volatility in the crypto market.

 

Crypto is a new asset class

 

Compared to other markets, such as stocks, commodities, and fiat, crypto is extremely young. Most other markets have been traded and engaged with for centuries, whereas crypto only existed in 2008 with Bitcoin, and for the most part of crypto’s history, there were only a handful of coins to invest in. It has only been in the last five or so years that there has been such a large plurality of coins and tokens to trade.

 

The lack of age and experience in the crypto market means that most technical analysis does not work, as there is simply not enough historical data for it to be accurate. This makes for volatility, as only a small handful of traders will try to perform technical analysis right now, and even then there is less chance it will be as successful as with an asset class such as commodities (where we have a vast wealth of knowledge about how it acts as a market).

 

The crypto markets do not close

 

Most financial markets have opening and closing times. For instance, most trading does not occur over the weekend, or after 5pm (depending on the country you are in), because the world of trading is usually seen as a 9-to-5 job. In many ways, this shows the sheer age of other markets, as most of them existed before the internet did, and so 24/7 trading was never viable. With that being said, there are still ways to trade traditional assets during weekends and non-work hours, although these trades usually have less liquidity, and so many investors avoid doing so.

 

The crypto market, however, has no closing times. Everybody is trading on all days, at all hours. The fact that there is no stopping crypto trading means that it becomes more unpredictable, and so it is harder to follow. With traditional markets, a trader can be confident that less value will move after office hours, but with crypto anything goes as liquidity does not disappear on weekends or after hours.

 

More retail investors

 

Crypto might be the most open and accessible asset class in the world. People can begin trading instantly and (although it does help) they do not need any knowledge of finance or economics to begin engaging with the market. Additionally, because of the youth of the market, and because of how many people got rich by merely holding onto coins for long enough, there is a lot of money in the market from people who do not have a great deal of trading experience. There are also a ton of crypto traders who are in the market because they know about the technology, rather than know about the economics of it, so the market will not always move in the same way as a market would if it was filled with trained economists (like how FOREX and stocks are).