Why Are Cryptocurrency Prices So Volatile?

 

1, Markets are narrative driven.
Cryptocurrencies do not generate returns like equity instruments that have revenue and profit data. The value of crypto assets cannot be estimated through ordinary capital market approaches such as through a company's financial performance or traditional fundamental indicators such as the price to earnings ratio. What happens is, the price of crypto assets is strongly influenced by certain narratives or news. For example, the rapid increase in the price of cryptocurrencies in 2020 was driven by Elon Musk's tweets on Twitter and his views on crypto assets.

2. Trading volume on crypto asset exchanges cannot be measured,
while on-chain size data cannot explain the actual conditions of the crypto market. The crypto market is formed from a network of diversified exchange platforms and providers rather than one centralized exchange. As a result, each crypto-asset exchange platform has different crypto-asset prices from one another. In other words, cryptocurrencies do not have a single price. This is different from the conventional capital market, where data on prices and volumes of securities traded clearly correspond to activity on the stock exchange. Investors also have difficulty measuring the trading volume of crypto assets because the on-chain volume data of a cryptocurrency does not reflect the total trading data that occurs across all crypto asset exchange platforms.

3. Momentum and volatility occur when the market responds to the trading algorithm.
In theory, cryptocurrency prices between crypto trading platforms do not differ much from each other due to the presence of algorithm-based trading in them. However, in reality, using algorithms for trading can make prices move drastically. For example, a decrease in the price of a crypto asset will trigger a “sell” action if the trader places an automatic sell at that price level. Unfortunately, this event will also be read by other market participants as a sell-off, so other traders will be too talkative by selling their crypto assets.