Crypto prices – regardless if we’re speaking of Ethereum or another asset – is influenced by supply and demand. Let’s take Ethereum’s price for example, it’s determined by how interested the public is to buy it (demand) and how much it’s available on the market (supply). A coin’s price usually spikes when it has a low supply and increased demand. As expected, when few people are interested in purchasing it, but the supply is increased, its price will drop. This relationship is one of the most important factors that impact crypto prices. However, if you want to make an ETH price prediction, you should know that several other factors influence crypto volatility.
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Understanding volatility
The crypto ecosystem is highly volatile – everyone knows that. Even a well-established asset like Ethereum will register significant price swings, and it’s essential to understand what triggers them if you want to trade it.
Volatility in the crypto sector refers to how much a coin’s price increases or decreases over an established period. During high volatility periods, assets register frequent and large price changes, and the opposite happens during low volatility periods. The more unpredictable and volatile a cryptocurrency is, the riskier it is to trade it. However, quite often, these risky assets are the ones that provide investors with the highest profit, so they should use the right trading strategies.
Is crypto volatility different from traditional assets’ volatility?
The crypto market is relatively young compared to the other ones and, hence, is more volatile. Investors usually view digital currencies as riskier than traditional assets, and for good reasons, as their prices fluctuate wildly. However, they’re not the only volatile assets in the financial world; stocks also fluctuate greatly in price. While large-cap stocks like Apple and Google are more stable, small-cap ones witness significant movements. Bonds, on the other hand, are an example of assets that register little price movement.
However, crypto volatility is in its own league, and a simple glance at assets’ prices will confirm this statement. You will notice how cryptocurrencies like Ethereum and Bitcoin registered aggressive drops and skyrocketing rises over the years.
Factors that influence crypto volatility
Liquidity and market capitalization
Liquidity plays a significant role in determining how volatile a cryptocurrency is. In traditional financial markets, assets with higher liquidity tend to experience less volatility because there are sufficient buyers and sellers to stabilize price movements. In the crypto market, however, liquidity varies widely across different tokens. Bitcoin (BTC) and Ethereum (ETH), as the largest cryptocurrencies by market capitalization, tend to be less volatile than smaller altcoins. Their deep liquidity means that even large trades do not drastically affect the price.
Low-cap altcoins, on the other hand, are more prone to extreme price swings due to thin order books. A single large buy or sell order can create substantial price shifts, leading to rapid gains or losses.
Supply and demand dynamics
Like any asset, the price of cryptocurrencies is driven by supply and demand. However, in crypto, these dynamics are influenced by several unique factors:
- Fixed supply models: Unlike fiat currencies, many cryptocurrencies have a predetermined supply limit. Bitcoin, for example, has a maximum supply of 21 million coins, making it inherently deflationary. As supply dwindles due to halving events (which reduce mining rewards), demand may increase, leading to price surges.
- Token burns and staking: Some cryptocurrencies implement mechanisms that reduce circulating supply over time. Binance Coin (BNB), for instance, undergoes periodic token burns, reducing the total supply and potentially increasing demand. Similarly, staking in proof-of-stake (PoS) networks locks up a portion of a cryptocurrency’s supply, making it scarcer and potentially driving up prices.
- Market sentiment also plays a critical role in demand fluctuations. Positive news, such as regulatory approvals, partnerships, or mainstream adoption, can boost demand, while negative events like hacks, bans, or scandals can trigger sell-offs.
Regulatory developments
Regulation remains one of the most significant factors influencing crypto volatility. Because cryptocurrencies operate in a largely unregulated space compared to traditional assets, regulatory changes can have an outsized impact on prices. When governments impose restrictions on crypto trading, taxation, or mining, it often leads to panic selling. For example, China’s repeated crackdowns on Bitcoin mining and trading have historically triggered sharp market corrections. Conversely, favorable regulatory developments can boost confidence in the market. The approval of Bitcoin exchange-traded funds (ETFs) in certain jurisdictions, for instance, has historically driven prices higher by attracting institutional investors.
Macroeconomic factors
Cryptocurrencies do not exist in isolation—they are increasingly influenced by macroeconomic conditions, particularly in the broader financial markets.
When central banks raise interest rates, investors tend to move away from riskier assets, including cryptocurrencies, in favor of safer investments like bonds. This was evident in 2022 when aggressive rate hikes by the U.S. Federal Reserve led to a prolonged crypto bear market. On the other hand, high inflation or concerns about fiat currency stability can drive demand for cryptocurrencies as a hedge against devaluation.
Market sentiment and speculation
The crypto market is highly sentiment-driven, with price movements often influenced by speculation rather than traditional fundamentals. Social media, influencer endorsements, and news headlines can trigger rapid price swings. Unlike traditional stock markets, where institutional investors dominate, the crypto market has a strong presence of retail traders who often react emotionally. When prices surge, fear of missing out can drive a buying frenzy, leading to parabolic price increases. Conversely, panic selling can trigger steep declines.
Elon Musk’s tweets about Dogecoin (DOGE) and Bitcoin serve as prime examples of how social media influence can drive dramatic price changes in the crypto space.
Security and network stability
Since cryptocurrencies rely on decentralized networks, security plays a vital role in determining price stability. When major crypto exchanges experience security breaches, investors may lose confidence in the market, leading to sell-offs. The 2014 Mt. Gox hack, where nearly 850,000 BTC were stolen, remains one of the most infamous examples of how security vulnerabilities can trigger extreme volatility.
Blockchain networks undergo periodic upgrades to improve functionality. However, hard forks—where a blockchain splits into two separate chains—can create uncertainty and impact prices.
Volatility is a double-edged sword in crypto markets
A complex mix of liquidity, supply and demand, regulatory developments, macroeconomic factors, sentiment, security, and institutional activity drives crypto volatility.
