Understand why crypto prices are so volatile 

• Crypto markets have historically been more volatile than traditional markets for some time, though recent data suggests that this trend may be slowing down. 

• The reasons for this increased volatility are likely due to liquidity (supply and demand), regulation, and crypto being predominantly sentiment driven. 

• More volatility creates a more extreme risk and reward profile, but investors can take simple steps to manage the impact of volatility in crypto, which we’ll explore below. 

Cryptocurrency markets are notorious for being extremely volatile, especially when compared to traditional financial markets.

Because virtually anyone can speculate on highly illiquid digital assets, every hour of every day, the volatility simply comes with the territory.

While many traders are drawn by this volatility, others regard it as one of several factors that make crypto a very risky asset class.

This article examines examples of historical crypto volatility, why this asset class is more volatile than traditional markets and how investors can manage crypto volatility.

Crypto volatility: The evidence 

Since the first recorded trade on October 12th 2009, Bitcoin (BTC) has experienced dramatic swings in price:

The lowest price ever recorded was $0.00099 per coin in 2009. In 2010, BTC closed at $0.30 - representing a 9,900% gain for that year.

Bitcoin is notorious for large intra-year and intra-cycle pullbacks, the biggest of which came in June 2011. Following the Mt. Gox exchange hack, Bitcoin traded from ~$31 to $2 in a matter of months - a 93% drop. Bitcoin would go on to have four more retraces of 50% or more between 2013 and 2022, despite a series of new all time highs.

Bitcoin volatility has been trending down over the years, likely a function of its growing market cap (more capital is required to have an equal or larger impact).

Altcoins are typically more volatile than Bitcoin, with several coins having 90+% drops before recovering. Between 2013 and 2015, Litecoin (LTC) dropped 97% from its high of $50 down to $1.30. It later rallied back up to a new high of $360 in 2017, marking a 27,600% increase from its 2015 low.

The largest drop in a single day on Bitcoin was ~50% on March 12, 2020 during the “Covid Crash”.

Note that most cryptocurrencies do not recover from such losses. Of the over 24,000 cryptocurrencies listed on CoinGecko since 2014, 14,039 have died (at press time).

What does volatility mean in crypto? 

Volatility refers to the degree of variation in the price of a financial asset over a specific period. 

In simple terms, an asset that experiences large price fluctuations in a short period is considered more volatile than one that shows relatively stable price movements. 

As evidenced above, cryptocurrencies are notoriously volatile. Investors should exercise extreme caution and robust risk management when interacting with these markets.

There are many factors that explain why crypto tends to be more volatile than traditional markets, but this article focuses on the following:

• Lack of liquidity.

• Lack of regulatory clarity.

• Retail and sentiment driven.

These factors are discussed in more detail below.

Crypto market volatility vs. traditional markets 

Between 2020 to 2024, Bitcoin has been three to four times as volatile as various equity indices. However, Bitcoin can be less volatile than larger securities (Netflix is a good example) and over the last few years, has at times been less volatile than many companies in the S&P 500. 

In the last year (2023 to 2024), we’ve witnessed a noteworthy drop in realized volatility. What might be the cause of this?

• Cryptocurrencies as an asset class are garnering more institutional adoption, in light of the Bitcoin and Ethereum (ETH) spot ETFs. With institutions comes liquidity, and arguably a longer term mindset. Private companies and ETFs control roughly 6% of the circulating supply. 

• Price discovery takes time — cryptocurrency is a nascent asset class. Bitcoin has been around for only 15 years and many altcoins are less than a year old. Perhaps after 15 years, Bitcoin is significantly closer to a fair market price.

For more information on Bitcoin and Ethereum exchange-traded funds, check out our Kraken Learn Center article, What are crypto ETFs?

Why is crypto so volatile? Key factors explained 

There are a perhaps three main reasons why crypto assets tends to be so volatile compared to other markets. Let's explore each of these in more detail.

Lack of liquidity

What drives Bitcoin’s price up and down? Supply and demand is one factor, and this is closely connected with liquidity, as larger holders of certain coins can easily move the price.

Traditional markets are known for deep liquidity, and generally tend to be more liquid than crypto markets.

Liquidity contributes to a stable market by buffering against extreme price swings and market manipulation. Because many cryptocurrencies are generally illiquid they are also more vulnerable to global news events that impact on risk-on assets.

Lack of regulatory clarity

There is no unilateral agreement about how cryptocurrencies should be regulated globally, and the stance taken towards them varies considerably between nations. As a result, one large nation deciding to ban cryptocurrencies can have a significant price impact, as was the case in 2021 in China.

Retail and sentiment driven

Historically, cryptocurrency markets have been dominated by retail investors that are oftentimes heavily influenced by fluctuations in price.

While it’s possible to try and value Bitcoin via comparisons to similar assets and production costs, news sentiment plays a significant role in how people trade cryptocurrencies.

Without clear metrics for valuing cryptocurrency like those that exist in traditional markets, it may be the case that sentiment accounts for a lot of the speculation in crypto markets.

What does the research say?

A 2022 study examining what drives volatility in Bitcoin identified four factors, which generally support the ideas mentioned above:

• Google trends.

• Total circulation.

• Consumer confidence.

• S&P500 Index (Bitcoin has for periods traded very similarly to the S&P500).

How to measure crypto market volatility 

Here are four ways you can measure crypto volatility:

Historical Volatility (HV): Historical volatility measures the fluctuations in the price of a cryptocurrency over a given period. It is usually calculated as the standard deviation of the price returns and is expressed as an annualized percentage. High historical volatility indicates that prices have fluctuated significantly in the past, while low volatility suggests more stable price movements.

Average True Range (ATR): The average true range of an asset calculates the average range in price examined over a given period. For example, a 20 period daily ATR works out the average variation in price per day by looking back at the last 20 days. ATR is a technical indicator that can be easily accessed on the Kraken Pro platform, and can offer some indication as to the expected volatility over any time frame you are interested in. 

Volatility Indexes: Traditional markets have something called the “VIX” - a volatility index that measures “...30-day expected volatility of the U.S. stock market.” Crypto doesn’t have such an established equivalent, but in June 2023, a paper was published detailing the creation of a crypto focussed volatility index, or “CVIX”. You can find out more here.

Bollinger Bands: Bollinger bands are another technical indicator that can be used to visually display volatility and potentially highlight when it is about to increase. When the bands become notably tighter and contracted, what often follows is an expansion in volatility in the form of a breakout (or fakeout). 

How investors may manage crypto volatility 

Central to any good investment strategy is risk-management. While crypto markets offer outsized returns compared to other markets, they also offer the very real risk that the asset you are investing in crashes and does not recover. 

Here are practical steps that some traders may decide to take to account for crypto volatility:

Examine historical volatility and adjust accordingly

While there are many new cryptocurrencies being created on a daily basis, many older more established coins have extensive price history which can be used to measure volatility.

This information can then be used to determine position size, tailored to your risk-appetite. For example, if you plan to invest in Bitcoin for the next 5 years, could you stomach another 50%+ decline without capitulating (panic selling)?

Risk only what you can afford to lose

Trading psychologist Mark Douglas famously wrote of markets that “Anything can happen.” This is a concept that all investors must embrace when considering how much they should risk.

While you could make the case that Bitcoin is unlikely to trade to zero, a black swan event could erase a huge percentage of its market cap overnight. Altcoins — in particular memecoins — are much more likely to suddenly crash without recovering. In April alone, investors lost $26.7m to memecoins that “rugged” on Solana.