Why Is Bitcoin Volatile?

Written by Sean GraytokUpdated: 24th Nov 2021
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This article will explain why bitcoin is a volatile asset, explore its volatility history, and discuss best practices for navigating its large swings in price.

Why is Bitcoin Volatile?

Bitcoin’s price volatility is a factor of its age and the free and open nature of the market in which it trades.

The asset is very new and still in the early stages of its adoption.

The Bitcoin network is monetizing in real-time and sometimes lacks the liquidity to connect large buyers and sellers seamlessly.

Additionally, the asset trades 24 hours a day, which creates a certain kind of urgency around price discovery that is not found in traditional markets.

Hyper cycles can play out on much shorter time frames and too much larger degrees in the Bitcoin market.

Excessive leverage in the market helps fuel these cycles.

Some Bitcoin exchanges offer 100x leverage to traders, contributing to a series of liquidations that send the price of bitcoin in free fall.

It’s important to note that volatility works both ways. Markets have to go down for them to go up, and vice versa.

Ok, let’s review why bitcoin is so volatile:

  • New Asset
  • Trades in a free market
  • Lower liquidity
  • Hype cycles
  • Excessive leverage

New Asset

Bitcoin is a global network of millions of users, yet its network value in USD remains less than several publicly-traded companies.

Bitcoin is commonly referred to as “gold 2.0” for its similar store-of-value properties, at least in theory, yet gold has a market value 10x that of Bitcoin.

Bitcoin remains a relatively small asset despite its potential.

Its liquidity has increased over the last decade but remains low relative to the asset’s reach and ambitions.

Free Market

Bitcoin trades in a free and open market.

It is up to buyers and sellers to determine bitcoin’s price without the intervention of third-party oversight and other forms of soft-manipulation commonly found in traditional finance.

The free nature of its market, combined with the infancy of the asset, can result in substantial disagreements in price between market participants.

When these disagreements materialize into price corrections, bitcoin will fall and fall until enough market participants step in and buy at a price they believe to be fair value.

You will not see third-party institutions attempt to mitigate losses by pausing trading or injecting stimulus because bitcoin is not controlled by a centralized authority.

Bitcoin’s monetary policy remains unchanged regardless of its price action.

This is perhaps one of Bitcoin’s greatest features.

Lower Liquidity

Bitcoin’s low liquidity can prevent buyers and sellers from executing trades at their preferred price.

This predicament can generate high volatility in price to better match buyers and sellers.

Bitcoin’s lower level of liquidity is a function of its age and will continue to improve as more adoption takes place.

However, in some respects, bitcoin is the most liquid asset.

It trades 24/7/365, and while there may be some slippage on the trade, it can be converted to cash at any hour of the day and any day of the week, unlike your shares of Apple or the S&P 500.

Hype Cycles

In his book The Bullish Case for Bitcoin, Vijay Boyapati describes how the monetization of Bitcoin occurs in a series of Gartner hype cycles.

Bitcoin Volatility Explained

Boyapati writes:

Volatility is lowest during the plateau phase of the cycle and highest during the peak and crash phases of the cycle. Each hype cycle has lower volatility than previous cycles because the liquidity of the market has increased.

The emphasis here is a series of hype cycles. We can visualize this below:

Bitcoin Hype Cycles Volatility

Not only is there a series of cycles, but each subsequent cycle is less severe.

Higher highs and higher lows are set with each one, and they directionally go up and to the right.

These cycles have historically been driven by bitcoin halvings and are beautifully captured in the logarithmic price chart of bitcoin:

Bitcoin Price Volatility

Excessive Leverage

The amount of leverage in the Bitcoin derivatives market contributes to the asset’s volatility, but the type of leverage is the key to focus on.

A trader must post collateral when they bet on the future price of bitcoin and open a futures position.

Collateral essentially funds their transaction and allows them to borrow capital.

But things get interesting when that posted collateral is bitcoin.

If a person goes long BTC and the price starts to go against him, the value of his collateral is also decreasing. And as we know, bitcoin can move fast.

The value of his collateral falls below the value required by the exchange, and his account gets liquidated.

Liquidations are forced-selling on behalf of the exchange, and they put even more downward pressure on the bitcoin price.

This scenario creates the potential for a cascade of liquidations, where one triggers the next one below it until all the leverage is flushed from the system.

A series of liquidations is usually the reason for bitcoin’s famous sell-offs.

>> More: Best Crypto Exchanges

Bitcoin’s Largest Volatility Events

Here’s a snapshot of bitcoin’s largest historical corrections:

  • January 2012: $7 to $4 (-43%)
  • August 2012: $16 to $7 (-56%)
  • April 2013: $259 to $50 (-83%)
  • November 2013: $755 to $378 (-50%)
  • December 2013: $1.2K to $152 (-87%)
  • September 2017: $4.9K to $2.9K (-40%)
  • December 2017: $19.7K to $3.2K (-84%)
  • June 2019: $12K to $5K (-61%)
  • April 2021: $64K to $32K (-51%)

These are examples of bitcoin’s volatility to the downside. The asset has recovered from each one.

Bitcoin Volatility: Frequently Asked Questions

Why is Bitcoin unstable?

Bitcoin’s price may appear to be “unstable” because it’s a small asset monetizing in real-time. Additionally, the secondary bitcoin markets have large amounts of leverage that fuels volatility.

Does bitcoin have high volatility?

Bitcoin has high volatility relative to your average asset. It’s not uncommon for bitcoin to move 12% in a single day in either direction. While bitcoin has had some historic crashes, its volatility has been mainly to the upside since its inception.

Is bitcoin a volatile stock?

Bitcoin is a rather volatile asset that can move double-digit percent within a day. However, its volatility has reduced as its adoption has increased, and that trend is expected to continue indefinitely.

Bottom Line: Bitcoin’s Volatility Explained

The short-term price action of bitcoin is completely unknown. But if you zoom out, it’s clear which way the volatility likes to go.

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This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and is a recognized expert in investing, cryptocurrency, and financial management. His work has been cited in leading industry publications, such as InvestorsPlace and Business Insider. Sean is interested in the people and companies who are driving financial innovation.