Understanding Why Are Bitcoins So Volatile in the Crypto Market

Bitcoins are often described as a volatile asset, and for good reason. The value of a single bitcoin can fluctuate wildly in a short period of time.

One major factor contributing to bitcoin's volatility is the lack of regulation in the crypto market. According to the article, the absence of government oversight and control means that there is no central authority to stabilize the market.

Another reason for bitcoin's volatility is the limited supply. The article notes that the total supply of bitcoins will eventually reach 21 million, which can lead to supply and demand imbalances and price swings.

As a result, bitcoin's value can be heavily influenced by market sentiment and speculation.

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Bitcoin's value can drop significantly in a short period due to a large sell-off by a single investor.

Market manipulation by a group of investors, known as whales, can also cause volatility.

These whales can influence the market by buying or selling large amounts of Bitcoin, which can lead to significant price fluctuations.

A lack of regulation and oversight in the cryptocurrency market contributes to its volatility.

The fact that Bitcoin is not backed by any central bank or government adds to its volatility, making it more susceptible to market fluctuations.

The global economic downturn can also impact the price of Bitcoin, causing it to fluctuate rapidly.

For example, during the 2020 global economic downturn, the price of Bitcoin dropped by over 50% in a matter of weeks.

The limited supply of Bitcoin, with a total of 21 million coins ever to be mined, can also contribute to its volatility.

As new investors enter the market, they can drive up the price of Bitcoin, only to have it drop when they suddenly sell their coins.

The supply and demand dynamics in the crypto space are particularly nuanced, thanks to the unique supply dynamics of many digital assets.

A limited supply schedule can create conditions where sudden increased demand puts even greater upward pressure on prices, increasing volatility. This is especially true for assets like Bitcoin, which has a supply cap of 21 million coins.

Large holders, often called whales, can significantly impact prices with their trades, sending prices soaring or tumbling. This is particularly concerning for smaller market cap assets, which are often more volatile and risky due to limited liquidity.

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The crypto market operates 24/7, meaning it's always open for trading.

Unlike traditional markets, which trade between set hours, Monday-Friday, the crypto market doesn't close.

This lack of regulation means there are no circuit breakers to dampen volatility, making the market susceptible to high volatility.

Circuit breakers are interventions by exchanges to control panic selling or destructive events, but the crypto market doesn't have these safeguards in place.

As a result, the crypto market's free market dynamics can be unpredictable and volatile.

Bitcoin has reached a new all-time high amid a positive regulatory outlook, but Microsoft shareholders said no to buying bitcoin.

Several U.S. states are considering bitcoin reserves, which could have a significant impact on the market.

Metaplanet has bought more bitcoin, contributing to the market's rebound after a holiday slump.

AI cryptocurrencies have seen a significant surge in value, making them a notable trend in the market.

Trump nominated a new SEC Chair, which could bring about changes in the regulatory landscape.

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Grayscale filed to convert its Solana Trust to an ETF, a move that could increase investment in the cryptocurrency.

XRP gained over 100% in value, outperforming many other cryptocurrencies.

Ethereum ETFs saw record inflows, indicating a growing interest in the cryptocurrency.

Gensler is leaving the SEC, which could create opportunities for new regulations and investments in the market.

Supply and demand dynamics play a major role in the volatility and price movements of any asset, but it's particularly nuanced in the crypto space.

The limited supply of certain assets creates conditions where sudden increased demand can put even greater upward pressure on prices, increasing volatility.

Bitcoin, for example, has a supply cap of 21 million coins, making it a fixed supply schedule digital asset.

Large holders, often called whales, can further compound this pressure with their trades, potentially sending prices soaring or tumbling.

Smaller market cap assets are particularly susceptible to the movement caused by whales' trades and are often more volatile and risky as a result.

Limited liquidity in the crypto markets means that these supply and demand shocks can have significant price impact, wholesale.

The crypto markets are not yet efficient enough to absorb these shocks without significant consequences.

Bitcoin's price volatility is a stark contrast to traditional markets, where you can find stability in large cap stocks like Google, Apple, and Berkshire Hathaway.

Stocks can be volatile, but their price movements are often less dramatic than those in the crypto market. Even bonds, typically considered lower risk, see less price movement than cryptocurrencies.

Crypto market volatility is in a different league altogether, with Bitcoin experiencing over eight 50% corrections in its 15 years of existence.

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The crypto market is still in its early stages, making it difficult for investors to gain exposure to it. This is partly because many of the financial products and instruments within the crypto ecosystem are still in development.

The total crypto market cap is a fraction of the size of the total U.S. stock market, standing at $2.1 Trillion compared to $44.85 Trillion. This limited size means there's less liquidity and depth to accommodate larger traders.

The crypto market is fractured across many different exchanges and trading venues, making it difficult for large players to enter or leave the market at 'size' without affecting prices and moving the market.

Crypto is riskier than traditional asset classes due to its high volatility. This is evident in the wide range of price movements, from skyrocketing rises to aggressive drops.

Stocks, for instance, have a relatively stable range, with large cap stocks like Google and Apple being less volatile than small cap stocks. Bonds are even lower risk, with higher grade bonds like US Treasury bonds seeing less dramatic price movement.

Crypto market volatility, on the other hand, is in a different league altogether. A glance at historical price action on charts confirms this, with Bitcoin witnessing over eight 50% corrections in its 15 years of existence.

Speculation and news events, such as COVID-19, drive price swings in both crypto and mainstream markets. However, the effects of these events are often exaggerated in crypto due to its unique features and immature nature.

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Bitcoin's volatility can be unsettling for investors, but it's essential to consider the bigger picture. Historically, Bitcoin's returns have been skewed to the positive side, with a Sharpe ratio of 0.96 from 2020 to early 2024, indicating investors have been compensated for taking on more risk.

The Sortino ratio, which measures downside risk, reveals that Bitcoin's volatility was largely to the upside, with a ratio of 1.86, nearly double its Sharpe ratio. This suggests that investors have been more likely to experience significant price gains than losses.

As a result, investors may need to reevaluate their perception of risk and volatility. While Bitcoin has experienced significant price drawdowns, the data suggests that the potential for gains outweighs the potential for losses.

Sentiment plays a huge role in crypto markets, with investor emotions spreading like a contagion due to the immaturity of the overall market.

This is largely down to the psychology of crypto investors, who are often less informed and more impressionable than seasoned traditional investors.

A great example of this is when Tesla bought Bitcoin in January 2021, triggering a massive price rally to around $69,000 in the following months.

The FOMO factor is particularly prominent with speculative assets, as investors often hear stories of prices rising during a bull market and feel pressured to enter the market and share their experiences with others.

This can create a positive reflexive feedback loop with high demand for an asset, causing major price movements that are often unsustainable.

Bitcoin's volatility is often misunderstood, but it's essential to understand that it's not always a bad thing. In fact, its historical returns show that many are disproportionately skewed to the positive side.

Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024 is a testament to this, meaning investors have been more than compensated for taking on the risk. This is a significant difference from the S&P 500's Sharpe ratio of 0.65 over the same period.

The Sortino ratio, which only considers downside risk, reveals even more about bitcoin's volatility. With a Sortino ratio of 1.86, nearly double its Sharpe ratio, it's clear that much of the volatility was to the upside.

It's worth noting that bitcoin has experienced significant price drawdowns, but its price has moved quickly up versus down over time. This is evident in its monthly price returns, which show a positive mean of 7.8% from 2016 to 2024.

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If you're considering buying bitcoin, it's crucial to remember that crypto is highly volatile and may be more susceptible to market manipulation. It's also essential to understand that crypto holders don't benefit from the same regulatory protections as registered securities.

You should only buy bitcoin with an amount you're willing to lose, and it's critical to learn as much as you can about what factors influence its price before entering the market. This includes understanding the big historical price swings that have occurred on a relatively frequent basis.

Bitcoin's volatility is not for the faint of heart, but for those who are willing to take on the risk, it may be worth considering.

Bitcoin's price movements can be unpredictable, but there is a classic psychological narrative that links volatility to future price movements. This narrative is based on the relationship between bitcoin's realized volatility and addresses in profit, also known as seller energy.

As price rises out of a bear market, the number of addresses in profit increases, and seller energy reaches its high. This typically happens in a low volatility environment, where the price and percentage of addresses in profit steadily rise until a new all-time high is reached.

Volatility begins to pick up as price accelerates, and both volatility and the percentage of addresses in profit become high. This marks the transition from a price appreciation phase to a new phase of price movement.

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A classic bitcoin cycle sees a long bear market with a low percentage of addresses in profit and high volatility followed by a subsequent decline in volatility and still the low percentage of addresses in profit, or a price bottoming phase.

The number of days below an all-time high peaks just as volatility reaches its low, signaling a potential price bottom.

As price rises out of the bear market, there is a rise in addresses in profit as seller energy reaches its high.

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Volatility begins to pick up and price accelerates as we enter a phase where volatility and the percentage of addresses in profit are both high.

This is a crucial point to watch, as it can indicate a shift in market sentiment and a potential price surge.

The growing interest from institutional investors has played an increasingly important role in bitcoin's price movements, contributing to its volatility.

Bitcoin whales, individuals or entities that hold large amounts of bitcoin, can also significantly influence the market, making it harder to predict future price movements.

However, by paying attention to the relationship between volatility and addresses in profit, we can gain valuable insights into potential price movements.

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Range-Based Realized is a key metric to understand price movement in Bitcoin.

Range-based realized volatility was 1.74% higher than daily realized volatility, which is not entirely surprising given the calculation.

Bitcoin's range-based realized volatility was in the ~79 percentile relative to the S&P 1500 on average.

This means that on average, Bitcoin's range-based realized volatility is significantly higher than the S&P 1500.

Range-based realized volatility has not experienced a proportionate reduction in extreme peaks over recent years, which is a notable trend.

The higher levels of range-based compared to daily close-over-close realized volatility contribute to the perception that Bitcoin is highly volatile.

Bitcoin's return fluctuations were lower than roughly 900 stocks in the S&P 1500 and 190 stocks in the S&P 500 during the months preceding, during, and after the March 2020 stock market crash.

Mazur's study found that Bitcoin was less volatile than assets like oil, EU carbon credits, and select bonds during the market crash period.

Over the past decade, there has been a significant decline in Bitcoin's daily realized volatility.

However, during the market crash period, Bitcoin's range-based realized volatility was significantly higher than the standard measure, using daily returns.

A closer look at the data reveals that Bitcoin's range-based realized volatility was lower than a long list of S&P 1500 constituents during the market crash period.

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Here's a comparison of Bitcoin's volatility with other assets during the market crash period:

It's worth noting that the data sources for certain assets diverged from those used in the original study, but the overall trend remains the same.

Bitcoin's volatility is largely due to its price discovery phase, which is still ongoing after 15 years since its inception.

The asset class is still finding its feet, and new participants entering the market continue to establish consensus on the fair value of digital assets, leading to price fluctuations.

As a result, investors gain more certainty in crypto's long-term future utility and regulatory standing, price discovery will continue to be a major driver of crypto volatility.

The relationship between bitcoin's realized volatility and addresses in profit is a classic psychological narrative that links seller energy.

A typical bitcoin cycle sees a long bear market with a low percentage of addresses in profit and high volatility, followed by a subsequent decline in volatility and still the low percentage of addresses in profit.

As price rises out of the bear market, there is a rise in addresses in profit as seller energy reaches its high, and the number of days below an all-time high peaks just as volatility reaches its low.

The growing interest from institutional investors has played an increasingly important role in Bitcoin's price movements, contributing to its volatility.

Bitcoin whales, individuals or entities that hold large amounts of Bitcoin, can significantly influence the market, affecting price swings.

The lack of intrinsic value and price discovery in Bitcoin contributes to its volatility, as investors struggle to determine its fair value.

Derivatives and leverage have also been a factor in Bitcoin's price movements, amplifying price swings and contributing to its volatility.

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