Key Insights

  • The crypto market can be incredibly volatile compared to other financial markets.

  • This is due to a combination of several factors, including supply and demand, market sentiment, manipulation, utility, liquidity, and competition.

  • Understanding why prices change so rapidly in the market can be the key to becoming a profitable trader.



The crypto industry is known as one of the most volatile financial markets overall.

One day, Bitcoin is flying sky-high, and the next, it’s plunging—the entire market turns red and billions of dollars in liquidity are wiped across the board.

This volatility is what makes crypto particularly interesting (and dangerous) for many investors.

The question at this point becomes: Why does this happen? 

What exactly affects the price of assets like Bitcoin and the rest of the market? 

Let’s see some of the factors that cause the push-pull effect the crypto market is now widely known for.

1. Supply and Demand

This factor is the most obvious explanation for this phenomenon. Like many other markets, crypto prices are heavily influenced by the dynamics between supply and demand.

If more people want to buy an asset than sell it, the price goes up. At the same time, if more people want to sell than buy, the price goes down.

Think of crypto like chocolate bars. 

If the entire world suddenly developed a craving for some Cadbury, many buyers would rush to retail stores to grab some.

This rush for chocolate bars would take up most of the item’s supply, making it incredibly scarce.

The more scarce an asset is—be it crypto, gold, diamonds, and so on—the more valuable it becomes, and vice versa. 

2. Market Sentiment and News

Another factor that drives the volatility of the crypto market is the news.

Crypto is highly sensitive to news and market sentiment. As such, positive news like partnerships, institutional investment, regulatory approval, and so on can drive prices up.

On the flip side, negative news like hacks, government crackdowns, or even wars can cause panic selling.

These buy/sell dynamics directly affect the supply-demand dynamics, causing pumps and dumps.

Interestingly, the crypto market has been shown to be sensitive to celebrity endorsements as well.




Elon Musk caused a Dogecoin pump in 2021. Source: X

Take the Elon Musk/Dogecoin saga of 2021, when the price of the cryptocurrency skyrocketed from a few cents to nearly a dollar because of mere tweets from the Tesla CEO.

3. Market Manipulation

The crypto market is large enough as it is. It currently has a market cap of around $3.25 trillion, and Bitcoin alone is more valuable than the entire silver market, Tesla, Walmart, Berkshire Hathaway, and even Meta, according to CompaniesMarketCap.


Bitcoin’s value comparison| Source: CompaniesMarketCap

However, the fact remains that the crypto market is still relatively new and a lot less regulated than traditional financial markets.

This means that crypto is more vulnerable to manipulation.

Some of the ways that manipulators have attacked the crypto market include pump and dump schemes, where crypto developers artificially inflate the price of a cryptocurrency, only to dump on investors.

Another is whale manipulation, where large investors (or whales) influence a cryptocurrency by buying or selling in large quantities, thereby causing rises and falls.

4. Utility and Use Cases

Sometimes the volatility of a cryptocurrency has less to do with supply, demand, or even manipulation and more to do with its real-world use cases.

If a digital asset has a strong use case and solves a real-world problem, it is more likely to be in demand.

Take cryptocurrencies like Ethereum, Solana, and Sui, for example, which power the world's strongest defi ecosystems.

Ripple is another example, with its fast and cheap international payment systems.

In essence, the more useful a cryptocurrency is, the more people want to buy and hold it.

This can cause price increases or price declines if a cryptocurrency is dependent on hype alone and has no real use cases.

5. Market Liquidity

Liquidity refers to how easily a cryptocurrency can be bought or sold without affecting its price.

Highly liquid markets tend to be more stable because they have enough buyers and sellers in them to absorb large trades.

When a cryptocurrency has high liquidity, prices become less volatile as buy/sell orders are more easily paired.

In contrast, a low-liquidity market can rise or fall quickly when there aren't enough buyers or sellers.

Bitcoin and Ethereum, for example, are more liquid compared to smaller altcoins. This is why it is significantly harder to manipulate their prices with large trades than lesser-known tokens.

Another factor is how competitive the crypto market is. New projects continue to emerge every day, each one with better use cases than the other.

When a new coin with better technology emerges, it can reduce the demand for an older one, causing a price crash for the latter as its own price soars.

Great examples exist between chains like Solana and Ethereum.

The previous memecoin boom happened on the Ethereum network and birthed the likes of Pepe and Shiba Inu.

This boom contributed to Ethereum's price increase as it soared to an all-time high of nearly $5,000.

The current memecoin boom is happening on the Solana network, and while Etheruem has remained trapped underneath the $3,000 zone, Solana has broken above the $200 mark several times in the last few months.

Overall

Crypto prices tend to fluctuate because of a combination of these factors.

Therefore, understanding why prices change so rapidly can help any investor stay ahead of the curve.

If you're planning to invest or are already invested in the crypto market, committing these factors to memory can help you make smarter investment decisions.

It can also help you to manage risks effectively in case of market crashes.