The cryptocurrency exchange rate is volatile, making trading risky but potentially profitable.

What Are the Main Reasons for Cryptocurrency Volatility

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Many investors are confident that the growth of cryptocurrency can bring them a solid passive income. However, the value of the coin can both increase and decrease. The range of possible changes is related to the volatility indicator.  

Cryptocurrencies have higher rate fluctuations than most assets. For example, bitcoin rose from $600 to $20,000 after the second halving and then fell to $3,500. If you understand the causes of volatility, which will be explained below, trading cryptocurrency will be less risky.

Cryptocurrency Volatility: General Information

The measure of how much the price of a coin changes, the statistics of fluctuations in value — this is volatility. The higher this indicator, the riskier it is to buy and sell cryptocurrency. On the one hand, it is the prospect of getting tens and hundreds of times more profit. On the other hand, you can lose most of the invested funds.  

Read more about other ways to use cryptocurrencies in our article. 

A clear historical example is the fluctuations observed in the first cryptocurrency bitcoin from the end of 2017 to December 2018. BTC first reached an all-time high and then collapsed by more than 80%. This figure is much higher than for many fiat currencies and securities. 

As with other assets, for cryptocurrencies, volatility is measured by calculating the deviation from the initial value in a given time period: a day, a month, a year, and so on. 

The indicator combines all deviations — both increases and decreases. For crypto holders, including investors, the volatility of the cryptocurrency market becomes a source of profit or, conversely, loss. Thus, the higher this parameter is, the riskier is the ownership of the asset. 

Volatility, a statistic of changes in the price of a cryptocurrency, determines the level of risk in trading.

Why Cryptocurrencies Are Highly Volatile

Among the reasons for sharp changes in the rate of cryptocurrencies are the following.

Lack of regulation at the state level

In most countries, the cryptocurrency segment is not regulated by legislation, or legal documents are only at the stage of development and approval. The main plus of this circumstance is the absence of restrictions, freedom of action. But there is also a disadvantage: fraud and speculation with cryptocurrency often go unpunished. Therefore, investors treat such assets with caution. 

About the TOP-10 countries on the introduction of cryptocurrencies read in our article.

Market conditions at a certain moment

Unlike fiat currencies, securities and other assets, cryptocurrency as such has emerged relatively recently. The community of participants is still in the formation stage, it is replenished by traders with little experience. That is why supply and demand fluctuate so much. 

While the cryptocurrency market is relatively small, holders react spontaneously. Every potentially significant event can choose a sharp rise or fall.

Lack of real collateralization of value

Unlike other assets, cryptocurrencies — except for stablecoins — are not tied to real collateral of value. Fiat currencies are backed by precious metals, production factors, macroeconomic statistics, and other resources. Securities are tied to the success rates of businesses. And the market capitalization of cryptocurrencies is related to the current demand for a particular coin locally and for bitcoins globally. 

Also read our article «Tether (USDT) Backing: Is It as Reliable as Claimed».

Influence of news, media publications and social networks

Sometimes the connection between changes in the exchange rate and certain news is quite easy to trace. But sometimes value jumps turn out to be unexpected even for experienced analysts. 

Sometimes cryptocurrency trends change not even because of the events themselves, but because of expectations and forecasts. The factors of influence may not be official press releases, but partially confirmed data from social networks.  

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The Most Volatile Cryptocurrencies

Some investors choose coins with stable exchange rates to avoid risks. Others act aggressively and expect to get rich quickly. The following are the cryptocurrencies with high volatility: 

  • Bitcoin. The first cryptocurrency to exist. There have been no sudden ups or catastrophic downs in recent years. By 2023, Bitcoin's volatility within one week has dropped to an average of 5-7%. But it is quite realistic to get high profits. 

  • Litecoin. This cryptocurrency system appeared in 2011 on the basis of bitcoin code. To date, the level of its volatility within one day is in the range from 2.3% to 4%. However, in the history of Litecoin there have been and probably will still be periods of volatility in the range of 45-47%.
    Cryptocurrencies with high volatility: Bitcoin, Litecoin, Ethereum, Solana, Dogecoin.

  • Ethereum. According to statistics, among all the demanded and popular cryptocurrencies, Ethereum is in second place. The level of volatility is almost the same as Bitcoin. However, in the history of this cryptocurrency there were periods when the value changed by 15-17% in two or three days. 

  • Solana. By January 2024, the volatility is at the level of 27-30%. However, in 2022, there was a short-term period when the value went up to 70% for a few days, and in 2021, there was a similar period when the value reached 80%. 

  • Dogecoin. The coin, based on the same principles as Bitcoin and Litecoin, came to a volatility of about 4-6% by the fall of 2023. However, in its almost ten years of existence, there have been short periods when the figure was 106% (April 2021) and even 175% (January 2014 and February 2021).

Why You Should Track Volatility 

By evaluating and forecasting the growth and fall of cryptocurrency, investors assess the risks of investing in it. This means they understand which coins to invest in and which ones not to invest in. In this case, it is reasonable to adhere to a number of principles: 

  • invest only the amount that can be painlessly lost;
  • make an investment portfolio, buying up different coins;
  • track halving, after which the rate often increases. 

The high volatility of cryptocurrency obliges to plan short-term transactions and intensively monitor the rate, as well as its changes. Some investors make their own forecasts and even develop authoring techniques for specific coins.

Volatility — Key Factor of Profitability and Risks

The indicator of volatility, reflecting fluctuations in value, cryptocurrency is higher than most assets. The reasons are the lack of legal regulation and the absence of a link to real values. Also, coins are susceptible to the influence of news. 

For investors, the volatility of cryptocurrencies is associated with potential losses. But it also determines the rate of possible profit growth. It is important not to act spontaneously and monitor the market to make the right decisions. 

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