Understanding the Factors Contributing to Cryptocurrency’s Volatility

As cryptocurrency continues to enter mainstream financial conversations, many people familiar with the space have come to understand that crypto is inherently volatile, often making it a fairly risky and speculative investment option.

What they may not know, however, are the factors that contribute to that volatility. Recognizing exactly what volatility is, what feeds into it, and why it matters can help prospective investors make more informed decisions that feel less like guesswork and more like strategic choices to add digital assets to their portfolios.

This knowledge can also help with navigating cryptocurrencies prices live, allowing investors to more quickly and mindfully respond to changes in the market.

Defining Volatility and the Tools Used to Track It

As a refresher, volatility in cryptocurrency can be defined as how much its value changes over time. If, for example, a currency experienced strong changes (positive or negative) over a short period of time, it would be described as volatile.

Given their volatility, crypto markets move particularly fast. Successful investors utilize real-time data via tools like exchange platforms to keep tabs on shifts across the market, many of which take place over the course of mere minutes.

Still, even the most experienced investors cannot possibly hope to keep up with the crypto market if they only react to changes after they happen. By studying the factors that tend to affect prices, knowledgeable investors can predict, to some degree, how the market may turn, thereby improving their chances of making a profit with their digital assets.

Regulations and Their Myriad Effects on Crypto Prices

Regulations and other legal challenges are among the primary factors that control the performance of many cryptocurrencies. While the regulations themselves either permit or restrict how users interact with crypto in a given space, these changes often have broader effects on market sentiment, quickly altering short-term prices as a result.

One clear example of this phenomenon can be seen in crypto ETFs. Business Insider reports that, after receiving approval from the SEC in 2024, “Bitcoin spot ETFs have seen inflows of $36.4 billion since they began trading in January, while Ethereum spot ETFs have garnered $2.4 billion since hitting the market in July.”

Of course, regulations also exist outside of the United States, adding a layer of legal complexity that often contributes to cryptocurrency’s volatility. While Bitcoin may prove successful in the U.S. due to regulations that allow it to do so, that may not be the case in other regions around the world.

The Impact of Global Events

International crypto regulations are not the only global events affecting its volatility and price. Political events, such as changes to a nation’s economic policies, developments in inflation, and even announcements from central banks, can all influence how well crypto performs in a given country.

In the U.S., for instance, recent speculation surrounding potential federal interest rate hikes has driven up Bitcoin prices, as more investors have begun to view crypto as a means of hedging against inflation and asset depreciation.

Some professionals note that, although it will present new challenges, adopting cryptocurrency on a global scale is worth considering. A study conducted by the World Economic Forum concludes that “allowing cryptocurrencies and stablecoins to play a regulated role in economies will have a major macroeconomic net benefit” provided they are properly regulated to strike a balance between innovation and risk management.

Institutional Adoption as a Means of Legitimization

Popular cryptocurrencies, such as Bitcoin, have recently caught the attention of major investors like BlackRock. This action has helped legitimize crypto, suggesting to many corporations and institutions, such as banks, that it is worth adopting. Fintech apps like PayPal and Visa have also followed suit by integrating cryptocurrency payments into their services. These movements and acceptance as a whole culminate in a positive outlook for crypto.

Technological advancements in foundational crypto innovations, such as blockchain, have also influenced demand. Popular applications like Ethereum Merge and Solana scaling have attracted tech-savvy individuals interested in what else cryptocurrency may have to offer.

A Stabilizing Future

It is too early to determine whether crypto’s current momentum will persist in the distant future. Institutional adoption, fiat alternatives, and shifting regulations have, more or less, made crypto more accessible and acceptable in recent years. However, there is no guarantee that these advancements will signal long-term success.

In the meantime, investors can rest a little easier, knowing that crypto trading will likely not always be a reactionary process. Factors such as regulation changes, movements by whales (large holders), and breaking news often cause swings in either direction and can influence sudden spikes or drops in cryptocurrency prices. By making use of the tools and knowledge that often influence how crypto markets move, investors can begin to view digital assets as an opportunity rather than a financial risk.