Everybody knows that the cryptocurrency market is notorious for its volatility. And yes, that is correct; no one argues about it. However, not everyone knows why it is like that and what the roots of all these swings and rallies are that one might see when checking the price chart of almost any cryptocurrency out there on the market. Today, we will try to go down the rabbit hole and highlight the reasons for such extreme market volatility, as well as what might cause the bumpy ride for the crypto markets in 2022.

Why is crypto so volatile?

Global financial markets, which include stock markets, for instance, also have their own share of price swings. However, traditional markets usually exhibit healthier volatility compared to the cryptocurrency market, which can experience heightened volatility and market swings literally because of rumors or Elon Musk tweets. Let’s take a closer look at the reasons why we can witness market chaos, a sudden price crash, and an equally sudden reach of an ATH (all-time high) price level on the same day. 


Lack of intrinsic value

The stock market, for instance, is backed by companies that sell tangible goods, earn revenue, pay taxes, and provide employment for people. Meaning, when a trader buys the stocks of any company, say Apple, he or she knows that this company has market value and particular economic goals and also has people in charge who take responsibility for the directions the company moves within the market. Thus, stocks are commonly way more stable and usually do not suffer from extreme price volatility, nor do they experience huge price fluctuations like cryptocurrencies. In other words, the stocks are part of companies that have a long history, credibility, and thus more trust among the traders and investors who buy the stocks knowing that they will inevitably grow in the long run.

Cryptocurrencies, unlike stocks, are hard to value since most of them lack fundamentals to base their market value on and many projects when they even list on the exchange do not have fully developed products so to say (less and less so but still). In many ways the crypto market is more like a venture market in terms of risks and the stage of product development but unlike the venture market these projects do have their listing on crypto exchange. So you get higher risk projects listed on exchange, a thus they are more prone to volatility then stock market with more mature projects in trading.

Certainly, it would be foolish to say that every token and coin out there has no fundamentals and solid base, since there are enough projects that can and should be seen as a serious play for investors, like Ripple, or Ethereum, or Monero. However, let’s not forget that there are over nine thousand coins listed on CoinMarketCap already, and unfortunately, most of them have nothing behind them, maybe except the passionate community or paid celebrities to promote them, which is not much for sustainable growth and stability.

In such circumstances, the value is quite often based on market sentiments, news from influencers or speculation, and they are often responsible for price movements. So, even if there are famous people behind a specific crypto, it does not save it from extreme volatility.

At this point, it is important to mention some of the numbers that are related to the crypto market: as of 05.03.22, crypto market capitalization is equal to $1.75trl, and Bitcoin’s share is around 42%. In other words, we still have BTC dominance here. So when the main cryptocurrency goes down, it usually drags most of the crypto market down with it, since so many investors and traders are still focused on Bitcoin’s price.

Certainly, it doesn’t mean that when we say “crypto” we mean “Bitcoin”, but they are still very related to each other. And that leads to a situation where it doesn’t matter how good the coin’s dev team is, what famous people stand behind it, or how passionate its community is — if Bitcoin’s chart is red, there is a good chance other coins’ charts will bleed too.

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Binance Coin year-to-date chart; Source: CoinMarketCap

Decentralization


Cryptocurrencies have caused a revolution within the financial sector, and their true potential is yet to be discovered in the future. It will take some time before traditional financial markets and fiat currency will have to compete with a contender in the face of DeFi and cryptocurrencies. And there are reasons for that.

Don’t get this wrong: decentralization is one of the reasons why crypto became so popular and managed to draw so much attention, as well as investors and their funds. However, there is a downside to this.

Since cryptocurrencies are decentralized, they do not have governments or any other powerful entities behind them to support their stable value. So that means, say, the USA or EU can stabilize and support their national currencies (e.g. through foreign exchange intervention), there are no mechanisms or tools to stabilize the price of a cryptocurrency besides the market’s ones. Thus, if traders lose faith in the crypto currency and stop buying it, it will lose its value drastically.

FUD


Fear. Uncertainty Doubt. This acronym is used to describe the spread of disinformation and attempts to influence market sentiment, thus fueling price swings.

It doesn’t matter what kind of FUD a trader has to face, be it media headlines, celebrity tweets, or the Telegram channel’s bot invasion, the result is always the same: the price moves down, and it is impossible to control this process.

Sometimes FUD can be unintentional, and sometimes it is done deliberately to bring the chart movement down and “buy the dip”. Since there is no regulation in the crypto space, public panic cannot be controlled or paused, and thus FUD can make a trader’s life much more complicated. 


Lack of regulation   

Just like with decentralization, lack of regulation has a much broader meaning in case of crypto.
Being both a good side and a bad side of the crypto world, lack of authorities like banks or governments directly affects the volatility of the crypto assets. The fact that no authority in the world has complete control over the transactions, distribution, and evolution of crypto and digital assets is certainly appealing, as it allows you to remain anonymous while making possible profits without the use of middlemen or time-consuming paperwork and ID checks.

Even with fiat money, stocks and bonds have entities that have control over their growth, spread, and issuing, and even that sometimes does not help in sudden rallies and price drops. Cryptocurrencies, in their terms, are freewheeling assets that cannot be governed or regulated to stay within certain borders, and that is a straightforward way towards uncontrolled price volatility.

Moreover, while stocks and bonds have strict rules and laws that prevent sudden pumps and dumps (e.g. Rule 10b-5 of the Securities Exchange Act), there are no such laws about crypto.

In addition to that, while crypto exchanges care about their reputation and usually try to list only those projects that have a solid basis, like a reliable team, massive community support, or interesting technology, the overall procedure of listing is much easier and faster than the one in stock markets, for instance. And this can sometimes result in the listing of coins that are not very stable, even by crypto market standards.

The world of crypto is still developing

The very first cryptocurrency, Bitcoin, has been known to the world since 2009. It’s been only 13 years, and the technology is still in its early stages of development. Most traditional banks and some governments are still very skeptical about crypto, to the point that sometimes crypto is banned or heavily regulated in selected countries. Until crypto is accepted everywhere, the news and rumors about upcoming restrictions and bans from different countries around the globe will inevitably affect the price of digital assets. That kind of reaction shouldn’t be surprising since crypto and DeFi (decentralized finance) can, in fact, become competitors to centralized finance and become an alternative to fiat money in the future. 

Moreover, the tech issues like blockchain scalability problems that can lead to network congestion and thus absurdly high transaction fees do not add serenity to the already highly volatile market. So, even in technical terms, the world of crypto is still young and will have to evolve further until it becomes more or less mature and thus stable. 

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Ethereum average transaction fee; Source: YCharts

Lack of “Big Money”


Yes, we are already aware that so many hedge funds and venture capital companies have opened their hearts, minds and wallets towards crypto currencies and blockchain technology. However, most institutional investors and major trading firms are very skeptical about investing in cryptocurrencies. Certainly, today’s cryptocurrency markets are much more mature and interesting for institutions than they were, say, five years ago. Still, the lack of regulations heavily reduces the willingness of “big money” to invest in digital assets. Thus, because institutional investors stay away from the cryptocurrency markets, they lack the solid base to be stable.

Inexperienced investors

Here is the thing: crypto is largely accepted and embraced by Gen Z and millennials, those who trust tech companies and corporations more than they trust the government. And crypto, unlike traditional markets like stocks or real estate, does not have high barriers to entry. Simply put, if you have access to the internet and a $100 starting capital, you can start investing and trading in the crypto market just like that. There is no need for accountants, trading licenses, or large starting capital. Low barriers and the absence of requirements have led to a sudden influx of inexperienced traders and investors into crypto markets who do not have much expertise in long-term investing.

All that means that when the market goes south, all these green investors tend to panic and dump their bags, thus creating chaos in the market. Moreover, if you add “whales” to this herd mentality in an already highly volatile market, you will get a picture of what crypto trading actually represents these days. 

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Likelihood to buy cryptocurrency in the U.S. 2017-2020, by age; Source: Statista

Why is crypto so volatile in 2022?

The year 2022 has just started and we already have a whole chain of events that managed to shake the whole crypto market.

In January, an unexpected surge in fuel prices sparked political unrest in Kazakhstan, the world’s second-largest Bitcoin mining country. Kazakhtelecom, the country’s state-owned telecoms provider, shut down the country’s internet after the country’s governing cabinet resigned. The decision has impacted the country’s bitcoin mining industry significantly, and thus the crypto market in general.

The US Federal Reserve’s December FOMC meeting confirmed that the central bank is committed to reducing its balance sheet and raising interest rates in 2022. All of this resulted in a drop in the price of BTC.

Currently, we are witnessing a war conflict in Ukraine, where Russia, the EU, The USA and some post-soviet countries are involved, one way or another. It has already impacted the crypto market and it is unclear when, and what is more important, how this war will end. Still, as of writing (03.03.2022), it looks like the crypto market is stabilizing and there are no signs of the market crashing either.
Moreover, President Joe Biden signed an executive order this week that is going to approve the US government’s strategy for dealing with crypto. According to reports, this order will direct federal agencies to consider potential regulatory changes as well as the national security and economic implications of cryptocurrencies.
For now, if we look at all these events strictly from the cryptocurrency market position, everything looks gloomy. However, some experts believe that the situation is not that bad and we might expect crypto market growth during this year.

Rafael Zanatta, head of business development at ETC Group, said that “Crypto markets have been volatile on the events of the past few weeks, and we have seen a significant drop across markets”, and he expects the crypto market to be volatile in the short-term. However, the fact that more countries and states continue to adopt and legislate crypto (e.g. California state that will allow paying for government services through crypto), should be a fundamental driver for the crypto market growth.
Charlie Morris, CIO of ByteTree Asset Management, believes that while volatility will stay within the crypto market, it is still much less severe than in previous cycles and expects that trend to continue, since we can expect more adoption of institutional investors and increased distribution.
According to a study conducted by Deutsche Bank, a quarter of Bitcoin investors believe the main cryptocurrency will inevitably pass the $100,000 mark in the near future, despite the volatility and recent price drops. So what are other events that can help in stabilizing the extreme crypto market volatility?

We might witness major tech and e-commerce giants to accept crypto this year. There’s long been rumors about Amazon and Apple to start accepting crypto, and it is difficult to confirm whether this might actually happen. However, the statements from Uber and eBay CEOs look more promising, as they have more clarity and we really might see these giants embrace crypto this year, which, of course, will have a very positive impact on the whole market.
PayPal, Microsoft, Sotheby’s, AT&T and more, all these companies already operate both within crypto and mainstream markets and accept cryptocurrency as the way of payment. And we can be sure that 2022 will add more companies to that list.

Will the crypto market volatility ever decrease?


It is hard to answer this question for certain since it looks like price volatility has become an integral part of the whole crypto market. Nevertheless, over time, we can all expect more regulations, evolved technologies, more mature traders, and wider acceptance from institutional investors. All these factors will inevitably make the crypto space more stable and thus decrease the volatility. Still, it surely will not happen in the near future, and it might take years before the situation changes. Until then, we will have to adapt and work with what we’ve got.

FAQ

What is cryptocurrency market volatility?

Volatility in crypto helps measure how much the price of an asset moves up or down over a certain period of time. You get higher risk projects listed on exchange, thus they are more prone to volatility than stock market with more mature projects in trading.

What crypto will jump in 2022?

Currently, we are witnessing a war conflict in Ukraine, where Russia, the EU, The USA and some post-soviet countries are involved, one way or another. It has already impacted the crypto market and it is unclear when, and what is more important, how this war will end. For now, if we look at all these events strictly from the cryptocurrency market position, everything looks gloomy. However, some experts believe that the situation is not that bad and we might expect crypto market growth during this year.