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Why is Crypto Volatile? How Do You Make the Best of It?

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Paxful Team
Paxful Team

Cryptocurrency is often called a “rollercoaster ride” for a good reason—prices can soar to breathtaking heights and plunge just as dramatically. Picture this: In January 2024, the price of Bitcoin was approximately $42,320. On 31st Dec. 2024, it traded at a price that had risen to around $93,350.  

Additionally, you might have read headlines like: “This trader 100X this meme coin in under an hour.”

Headlines of losses also abound.

This fluctuation in pricing, as shown in the examples above, is a characteristic of the crypto market. In this market, you can make massive gains, aka to the moon and also significant losses. 

Understanding why cryptocurrencies are volatile and how to navigate these price swings is crucial for anyone venturing into this market.

 Let’s dive into this fascinating topic.


💡Key takeaways

  • Understand what drives crypto volatility, such as market sentiment, liquidity, and lack of regulation.
  • Use strategies like dollar-cost averaging and stop-losses to manage risks.
  • Take advantage of price swings with informed decisions and proper risk management.
  • Follow market trends and use secure platforms like Paxful for safe trading.
  • Spread your investments to mitigate risks and capitalize on different opportunities.

What is crypto volatility?

Crypto volatility refers to crypto assets’ significant, unpredictable, and rapid price fluctuations.

Think of crypto volatility as riding a speedboat: it’s fast, agile, and thrilling, but it can quickly flip over if you’re unprepared. By contrast, traditional markets, like the stock market, are more like a cruise ship—slower to move but more stable.

Volatility in crypto isn’t necessarily a bad thing. For investors, it can mean both high risks and high rewards. Understanding what drives these price swings is crucial to making informed decisions.

Why is crypto so volatile?

Several factors contribute to crypto’s wild price swings:

1. Speculation and sentiment

 Cryptocurrencies thrive on speculation and sentiment. When news or social media hype about a coin spreads, it can trigger massive buying or selling. For example, a single tweet from an influencer can send prices skyrocketing or tumbling overnight- Elon Musk’s tweets about Doge-Coin are a case in point.

Let’s talk about FOMO (Fear of Missing Out):

  • When people see prices rising, they rush to buy, fearing they’ll miss the chance for profit. This herd mentality can drive prices higher—sometimes to unsustainable levels.
  • Conversely, fear can cause panic selling when prices drop, amplifying losses.

👉Learn more about FOMO and other slangs here: Crypto slangs for beginners.

2. Market maturity

Compared to traditional markets, the crypto market is an emerging asset class- a product of the internet age. 

This lack of maturity makes it more susceptible to sharp price movements than older, well-established markets like stocks or commodities.

3. Liquidity challenges

Crypto often experiences lower trading volumes than traditional markets. For example, a whale placing a large order to buy or sell Bitcoin in a thinly traded market can cause a noticeable price shift. This kind of movement would be minimal in highly liquid markets like stocks.

This means even a small number of trades can cause significant price changes, adding to its volatility.

4. Minimal regulation

With minimal regulatory oversight or gray areas worldwide on issues such as taxation, the crypto market can feel like the Wild West. Moreover, uncertainty about future rules and arbitrary regulatory actions, such as banning crypto trading in China in 2021, contribute to price instability.

For instance, rumors of a country banning crypto can trigger widespread panic selling, even if the ban doesn’t materialize. Conversely, news about favorable regulations can lead to sudden surges.

5. External factors

Macroeconomic factors like inflation, government policies, and global events influence crypto prices. For instance, concerns about traditional currencies losing value often drive people to invest in Bitcoin and stable coins like USDT and USDC.

6. Technological developments

 Breakthroughs in blockchain technology or updates to specific cryptocurrencies can also fuel volatility. For example, upgrades to a network, like Ethereum’s move to proof-of-stake, can lead to significant price movements as investors react to these changes.

Comparing Crypto volatility to traditional markets

1. Crypto vs. Stock market volatility

Cryptos experience more frequent and dramatic price swings due to their lower market capitalization and speculative nature. Stocks, by contrast, are backed by companies with tangible assets and established track records.

Here’s a handy analogy: Think of crypto as a startup—exciting, with an opportunity for significant growth but unpredictable. Stocks are more like established corporations—steady but less thrilling.

2. 24/7 trading hours

Unlike traditional markets that close at the end of the day, crypto markets operate 24/7. This constant activity means prices can change dramatically at any time, day or night.

3. Institutional stability

Traditional markets have mechanisms like circuit breakers to prevent extreme volatility  (e.g., a 7% decline triggers a 15-minute halt). There’s no such safety net in crypto, leading to wild price swings.

Most volatile cryptos

Some cryptocurrencies are more volatile than others. Bitcoin and Ethereum have historically shown significant price fluctuations, making them high-risk and high-reward investments. 

Conversely, Altcoins like Dogecoin and newer, less-established coins often experience greater volatility due to lower trading volumes and heightened speculation.

If you’re new to the market, it’s wise to start with more established cryptocurrencies before exploring these high-risk options.

👉Related: How to diversify your crypto portfolio.

Crypto volatility trading

While volatility can be intimidating, it also presents opportunities for savvy investors. Here’s how:

How to leverage volatility

  • Buy the Dip: Purchase crypto during price drops to sell at a profit when prices rebound potentially.
  • Day and swing trading: These strategies allow investors to profit from short-term price movements. However, they require experience and a strong understanding of the market.

Managing risks in volatile markets

  • Set stop-losses: Protect your investments by automatically selling when prices fall below a certain level.
  • Dollar-cost averaging: Invest small amounts regularly to mitigate the impact of price fluctuations.
    • For example, if you invest $100 monthly in Bitcoin, you’ll buy more when prices are low and less when prices are high, reducing overall risk.
  • Only invest what you can afford to lose. Never put your life savings into crypto—volatility can quickly wipe out investments. Always follow this cardinal rule when investing in crypto.

👉Learn more about DCA: What is Dollar Cost Averaging (DCA) in Crypto?

Benefits of crypto market volatility

 There is a popular saying in investment cycles: nothing ventured, nothing gained. This means that you cannot gain anything without taking risks. Some of the gains that can be achieved through crypto volatility include:

  • Opportunities for high returns: Volatility creates opportunities to profit from price swings. Many traders capitalize on these fluctuations to grow their investments.
  • Market efficiency: High volatility attracts participants, increasing market activity and liquidity, which can benefit long-term investors.
  • Democratized access: Unlike traditional markets, where significant capital is often required, crypto allows retail traders to participate and benefit from even small price movements.
  • Hedging potential: Volatility can make crypto an attractive hedge against traditional financial instruments, especially during economic uncertainty. For example, Bitcoin is often considered “digital gold” during inflationary periods.

What are the risks of crypto market volatility?

1. Loss of investment

Volatility can lead to significant losses, especially for beginners unfamiliar with the market’s dynamics.

2. Emotional trading

Fear and greed often drive impulsive decisions, causing traders to buy high and sell low during volatile periods.

👉Learn more about market cycles: Market Cycles: What They Are and the Psychology Behind Them.

How to manage crypto volatility

  • Do your research: Understand the coins you’re investing in. Knowledge is your best defense against market uncertainty.
  • Diversify your portfolio: Spread your investments across different cryptocurrencies to reduce risk.
  • Stay informed: To anticipate price movements, follow market news and trends. Reliable resources include crypto blogs, news outlets, and platforms like Paxful.
  • Use reliable platforms: Trading on trustworthy platforms like Paxful can protect your assets and provide tools to navigate volatile markets.

What’s the psychological impact of crypto volatility?

Psychologically, crypto volatility can lead to the following:

1. Emotional trading

Crypto volatility often triggers intense emotional reactions. Investors may experience:

  • Fear: Sharp price drops can lead to panic selling, locking in losses unnecessarily.
  • Greed: Rapid price surges might cause overconfidence and unwise investments.
  • Anxiety: Constantly monitoring prices can induce stress, especially during volatile periods.

2. Cognitive biases

  • Herd mentality: This is following the crowd—especially on social media—often resulting in impulse buying and selling. Although hardwired in human behavior, it usually leads to regret later.
  • Loss aversion: Investors tend to fear losses more than they value equivalent gains, leading to irrational decision-making.

What is the Importance of emotional discipline in crypto trading?

Managing emotions is critical for long-term success. With this in mind, develop and stick to a well-defined trading plan that outlines:

  • Entry and exit points.
  • Risk management strategies like stop-loss orders.
  • A commitment to avoid impulsive decisions based on short-term market movements.

Bottom line

Your crypto experience can be a wild ride! Prices can skyrocket one minute and crash the next. While this can be scary and lead to losses, it also opens doors to big gains.

The key is understanding what causes crypto prices to fluctuate so much. News, social media hype, and even global events can all play a role.

To stay safe, you need a plan. Diversify your investments; don’t put all your eggs in one basket. Use tools like stop-loss orders to limit your losses. Most importantly, you should only invest what you can afford to lose.

Platforms like Paxful can help you navigate this exciting (sometimes bumpy) journey. Remember to research, stay informed, and always prioritize risk management. 

💡Tip: Remember, the key to successful trading is staying informed, managing risks wisely, and using trusted platforms like Paxful. Happy trading!


Important Note : Paxful does not provide investment, tax, or legal advice, and you are solely responsible for determining whether any financial transaction strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances, and risk tolerance. Paxful may provide information that includes but is not limited to blog posts, articles, podcasts, tutorials, and videos. The information contained therein does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and you should not treat any of the content as such. Paxful does not recommend that any digital asset should be bought, earned, sold, lent out, or held by you, and will not be held responsible for the decisions you make to buy, sell, trade, lend, or hold digital assets based on the information provided by us.

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Paxful Team

Paxful Team

Paxful is a marketplace where people can buy and sell cryptocurrencies directly with each other. You can get digital money instantly and pay with debit, credit, cash, and any currency.

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