Lack of Regulation

One of the primary factors contributing to the volatility of the crypto market is a lack of regulation, which unlike traditional financial markets, is not regulated by any government or centralized authority. Though this is one of the inherent key features of cryptocurrency, it might be a contributing factor to its also inherent volatility. Due to the lack of centralized regulation, no rules or standards are in place to protect investors, prevent fraud, or to ensure market stability.

Market Sentiment

Another key factor contributing to the volatility of the crypto market is market sentiment. Because the crypto market is still an emerging space, it is largely driven by speculation and hype.

Lack of Fundamental Value

Unlike traditional financial assets such as stocks or bonds, crypto assets have no fundamental value — although many cryptocurrencies are built on underlying technology or technological applications that provide value. In large part, a cryptocurrency’s value is based on supply and demand. This means that the price of a particular crypto asset can fluctuate wildly, even in the absence of any significant news or events.

Limited Liquidity

Because the crypto market is still relatively small compared to traditional financial markets, there is often limited trading volume for many crypto assets. This means that even small buy or sell orders can have a significant impact on the price of a particular asset.

High Degree of Speculation

Many investors are attracted to the crypto market because of the potential for high returns in a short period of time — notwithstanding the potential for significant losses in a short period of time. This speculative frenzy can drive up prices to unsustainable levels, leading to sharp corrections as well as market crashes.

There is no single factor that makes crypto so volatile. A combination of being an emerging space, lack of regulation, market sentiment, limited liquidity, among others all contribute to the digital assets’ significant volatility.