Bitcoin and many other blockchain tokens are known for volatility, and understanding the reasons behind these fluctuations can help you make smarter investments. Here’s a look at some of the key factors that contribute to the dynamic nature of cryptocurrency markets.

But First, Not All Cryptocurrencies are Volatile

Volatility is relative, and prices do not necessarily fluctuate at the same rate for every token. In fact, stablecoins, which are tokens whose value is linked to the dollar or some other tangible asset, are no more volatile than the asset they’re pegged to. CoinFlip ATMs and CoinFlip Preferred sell USDT, PAXG, AUDD, and other pegged tokens for people who don’t want to surf the price waves.

Market Demand and Supply

Now with that digression over with, the most fundamental reason for price fluctuations in cryptocurrencies is a basic economic principle: demand and supply. When more people want to buy a cryptocurrency than sell it, the price goes up. The converse is true as well. This constant push and pull between buyers and sellers creates a dynamic market where prices constantly seek equilibrium.

Investor Sentiment

Investor sentiment plays a significant role in the cryptocurrency market. Positive news, such as regulatory approval or adoption by major companies, can lead to increased buying activity and higher prices. We saw this in early 2024 with the approval of the spot ETF for Bitcoin, which led to an all-time-high for Bitcoin a few months later. On the other hand, negative news, such as exchange scandals or regulatory crackdowns, can lead to panic selling and lower prices, like when FTX fell apart, kicking off the “crypto winter” of 2022. Point is, the mood of the market can change quickly, leading to price swings.

Media Influence

The media has a powerful influence on cryptocurrency prices. News articles, social media posts, and public statements by influential figures can all sway investor sentiment, like when Elon Musk tweeted that his favorite crypto is Dogecoin, causing one of the most massive price spikes in crypto history. The rapid dissemination of information in the digital age means that media influence can lead to swift and significant price changes.

Market Speculation and Liquidity

Speculation is to cryptocurrency prices what wildfires are to the forest – it tends to re-shape, and not always for the better. Many investors buy cryptocurrencies not for their utility but in the hope that their prices will rise. This speculative activity can lead to rapid price increases when investors are optimistic and sharp declines when they change their minds or get scared.

Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. Cryptocurrencies with higher liquidity tend to have more stable prices because large trades do not significantly impact the market. In contrast, cryptocurrencies with lower liquidity can experience more dramatic price changes when large trades occur. Bitcoin can withstand a few million dollars going in and out of the blockchain without much effect. A lesser-known coin, like HarryPotterObamaSonic10Inu, can price-correct by several percentage points from the buy/sell actions of a single market whale.

Market Manipulation

Unfortunately, market manipulation is a reality in the cryptocurrency world. Tactics such as pump-and-dump schemes, where the price of a cryptocurrency is artificially inflated before being sold off, can lead to significant price volatility. While regulatory bodies are working to combat these practices, the decentralized nature of crypto means no central authority can prevent market manipulation.

Technological Developments

Advancements and updates in the technology behind cryptocurrencies can also influence their prices. For example, improvements in blockchain technology, the introduction of new features, or successful upgrades can boost investor confidence and drive prices up. This happened when Ethereum switched to a proof-of-stake consensus mechanism, leading to a price rally. Conversely, technical issues or delays in development can lead to uncertainty and price drops. Many coins have died when they couldn’t surmount a technological barrier.

Regulatory Environment

Although the "wild west" nature of the cryptocurrency landscape contributes to its appeal for a great many users and investors, it does lead to significant value dips. The global regulatory environment surrounding cryptocurrencies updates often, and thousands of localities have their own rules around crypto. Announcements of new regulations or changes in existing laws can have a significant impact on prices, or limit what can be bought and sold. China and many north African countries outlaw Bitcoin usage, but if they change their minds the price could experience a major shock.

Macro-Economic Factors and Market Trends

The last few years have been a graduate-level course on how the big picture in global economics alters crypto prices. When stimulus checks gave millions of Americans extra cash during the pandemic, crypto prices surged as people sought a productive place to put the money they weren’t using. Then there was a second bump in 2024 as investors moved to crypto as a hedge against inflation. Conversely, during periods of economic stability, or when there isn’t much money to spend on investments, cryptocurrencies suffer, leading to price declines.

Finally, broader market trends and cycles can influence cryptocurrency prices. Bull markets, characterized by rising prices and investor optimism, can lead to sustained price increases. Bear markets, characterized by falling prices and investor pessimism, can lead to prolonged price declines. While the crypto market does not exactly match the S&P 500 or Dow Jones Industrial Average, it trends in a similar direction.

Financial Advice Disclaimer: Nothing in this article constitutes professional or financial advice, performance data or any recommendation that any specific cryptocurrency, portfolio, index, investment product, transaction or investment strategy is suitable for any specific person. You assume the sole responsibility of evaluating the merits and risks associated with all financial decisions and should seek the advice of a registered financial advisor when in doubt.