The Core Mechanisms Behind Bitcoin’s Volatility

Bitcoin has been around for about a decade. That may not seem like much in the grand scheme of things, but nevertheless, it has certainly made an impact in that time.

There’s no arguing about the great things that make Bitcoin what it is. And cryptocurrency, in general, has had a profound impact on fintech, for which Bitcoin is also largely responsible. Though many consider them securities or commodities, Bitcoin and other cryptos might very well be the standard money of tomorrow.

But Bitcoin isn’t perfect. One of its greatest faults is its volatility. We’ve all seen how much it can fluctuate, and we’re seeing it again. Just this past month, Bitcoin seemingly jumped off a cliff and hit a low of under $8,500 in a matter of days.

This kind of unpredictability simply won’t fly if cryptocurrency should stick around. Thus, solving this issue has become one of the most important tasks for crypto enthusiasts. And understanding the problem is half the job.

So what causes this kind of volatility? It is a combination of many facets.

Minuscule Market Size

Bitcoin’s current market cap stands at almost $150 billion. Sounds like a lot, doesn’t it? Well, in the grand scheme of things, it’s pretty tiny. For instance, NASDAQ handles some 11.22 trillion dollars. And NYSE is around twice as valuable.

So why does this matter in the first place? Smaller markets are, by their nature, more susceptible to fluctuations. These fluctuations are typically a result of changes in supply and demand.

Whether it’s a surge of positive sentiment or intentional market manipulation by a large investor, everything influences small markets more intensely. That’s the reason behind the flash crashes (i.e., sudden dips in security price) that happen occasionally. A larger market for Bitcoin would reinforce it against such actions.

Lack of Regulation

Bitcoin got to where it is now by riding the deregulation train, so to speak. Its core principle of eliminating third-party authority meddling was one of the main things that made it exciting to the world.

But it’s also what costs its stability. Other commodities or securities enjoy government and other structures which help them remain much more reliable. But Bitcoin basically runs on hype, meaning that there’s nothing to prop it up when its value starts dipping.

Government regulation could potentially solve the volatility issue, but it would mean stepping over the very tenants on which the concept of Bitcoin was created.

Low Liquidity

Liquidity also seems to be something Bitcoin struggles with. High market liquidity helps keep markets steady whenever large sales or purchases happen. A crucial recipe for good liquidity is having a lot of investors that hold relatively comparable amounts of the asset in question.

Bitcoin’s problem in this regard is that its market consists of many “whales,” which are massive players that can shake up the market with a few transactions. A good example would be the transaction that took place on September 5, 2019, which moved 94,505 bitcoins at once.

A more equal playing field would encourage more people to participate, which would reduce volatility. But telling people to join such a fluctuating environment just to make it safer rarely convinces them to do so.


Bitcoin has a lot going for it, but its current unstable state makes it problematic for widespread adoption. Its low market size, along with poor liquidity and a lack of regulation, renders it too vulnerable to slight changes.

And it seems that, unfortunately, the necessary changes to solve this problem entail taking away some of the aspects that make Bitcoin so beloved and unique.