Why are cryptocurrencies so volatile?

Cryptocurrencies aren’t much different from other commodities in that their prices are driven by the laws of supply and demand—if people want to buy, prices increase; if people want to sell, prices decrease. However, there are two main factors that make cryptocurrencies volatile.

The first factor is that cryptocurrencies have smaller market sizes as compared to established forms of currency. This means that even small movements of a cryptocurrency can have a pronounced affect on its price. Adding to this, cryptocurrency wealth distribution is even more skewed than that of traditional wealth, so the few with large stakes in a cryptocurrency (e.g., Bitcoin “whales”) hold disproportionate amounts of power over its pricing.

The second factor is that public perception of cryptocurrencies (Bitcoin in particular) is quite dichotomous. The recent price hike (Q2 2017) can be attributed to a number of factors (e.g., increased interest throughout Asia, increased enterprise adoption, Litecoin successfully activating SegWit to increase transaction throughput) that have increased positive sentiment in this space. On the flip side, a hard-fork, negative changes in the legality of cryptocurrencies, and hacks could very easily destroy their public interest.