The price of Bitcoin in 2023 is up by approximately 130%, from less than $17,000 in January to above $38,000 in late November—an impressive gain by any measure. Bitcoin holders are elated, naturally, but many O.G. crypto holders also know the pain of owning digital tokens as their values sharply decline.
What is happening when the cryptocurrency market is volatile?
A fluctuating crypto market has a value that changes rapidly, driven by price changes of the cryptocurrencies in the market.
Volatile crypto markets are labyrinthine, but how individuals and organizations react to crypto market volatility is even more complicated.
So many factors—news events, social media, technological developments, information asymmetries, evolving risk tolerances, and especially emotional decision-making—influence crypto user behavior.
You don’t need a psychology degree to understand the behaviors of digital asset holders—but you can better cope with crypto market volatility by understanding how other market participants are likely to react.
Keep reading to learn more about cryptocurrency market fluctuations and how they influence investors, traders, and organizations.
What Can a Fluctuating Crypto Market Influence?
A cryptocurrency market with rapidly changing prices may influence user behavior and trigger specific buying and selling patterns. Let’s explore these behaviors and patterns to understand the impact of crypto market fluctuations.
1. Trading and Investing Behavior
A volatile cryptocurrency market may cause crypto holders to react in two fundamentally different ways:
- Respond immediately: Highly reactive traders and investors, perhaps acutely sensitive to short-term price fluctuations, may respond to a significant change in cryptocurrency prices by immediately buying or selling.
- HODL: Long-term crypto investors are more likely to HODL—or “hold on for dear life”—to their digital assets regardless of market volatility. HODLers, myself included, react to short-term price fluctuations by not reacting at all.
HODLing isn’t right for everyone—that’s why traders may use tactical approaches to cope with crypto market volatility. Some of these tactics include:
- Portfolio diversification: Crypto holders may invest in a variety of cryptocurrencies and traditional assets to stabilize their total investment returns.
- Position sizing: Traders can limit position risk by carefully managing the size of each trade relative to their portfolio’s overall value.
- Dollar-cost averaging: Investors may establish significant cryptocurrency positions over time using dollar-cost averaging, which is the practice of regularly investing a fixed amount in a cryptocurrency regardless of its current market price.
- Using stop-loss and take-profit orders: Risk management tools like stop-loss and take-profit orders are often useful to active traders wishing to minimize their transaction risks.
- Hedging: A crypto investor or trader may address market fluctuations by hedging or investing in price-stable assets that offset the most volatile cryptocurrencies in their investment portfolios.
Considering the high and sustained volatility of cryptocurrency markets, what makes HODLing popular among many digital asset enthusiasts? I identify as a HODLer for several reasons:
- HODLing aligns with my long-term investment strategy
- Buying and simply holding cryptocurrencies eliminates the potential for short-term losses due to impulsive decision-making or market timing mistakes
- Infrequently trading cryptocurrencies minimize transaction fees and tax liabilities to maximize my investment portfolio’s performance
- HODLing may generate compounding benefits, such as regular dividends or significant price increases over time
2. Buying and Selling Patterns
Crypto market fluctuations can inspire buying and selling patterns that are both rational and irrational. Let’s examine some of these patterns:
- Crypto FOMO: Fear of missing out, or FOMO, is real in crypto. Investors worried about missing lucrative buying opportunities amid rapidly rising crypto prices are prone to making hasty, speculative decisions, perhaps purchasing digital assets without conducting the proper—or any—research. A large influx of new crypto buyers drives cryptocurrency prices even higher, fueling even greater FOMO.
- Opportunistic buying: HODLers may be likely to engage in opportunistic buying, which means purchasing cryptocurrencies when their prices are low based on the belief that market values are likely to rebound. Traders who “buy the dip” to profit from short-term price declines are also engaging in opportunistic buying.
- Panic selling: Just like FOMO during market bull runs, panic selling is common during market downturns. Rapidly decreasing crypto prices cause many panicked crypto holders to sell their digital assets as quickly as possible, hoping to limit their losses. Panic selling exacerbates market downturns, as large volumes of sell orders drive prices even lower.
The majority of these market patterns are driven by emotions, and yet significantly impact crypto market prices and volatility. Not succumbing to your feelings about the crypto market starts with understanding the importance of rational decision-making, a practice that is rooted in diligently conducting research and setting investment goals that feel meaningful to you.
3. Crypto Gambling Activity
How do cryptocurrency market fluctuations influence crypto gambling activities? Here are some quite interesting results:
A majority—83%—of crypto gamblers prefer to gamble with Bitcoin, and 51% manage their winnings by cashing out.
I’m not surprised that most crypto gamblers prefer to gamble with Bitcoin, given its widespread recognition and relative price stability. More than half of crypto gamblers choose to immediately convert their winnings into cash, indicating that many crypto gamblers wish to minimize their exposure to crypto market volatility.
A minority—31%—of crypto gamblers are less active when cryptocurrency price volatility is high, while 41% of crypto gamblers report no change in behavior.
This survey result demonstrates that cryptocurrency market volatility has a limited but non-zero impact on crypto gambling activity. A full 41% report no change in crypto gambling behavior—demonstrating that many crypto gamblers are exceptionally tolerant of and even comfortable with risk.
More crypto gamblers (42.76%) prefer to gamble when crypto prices are rising rather than when crypto prices are dropping (38.82%).
Everything about cryptocurrency is more exciting when token prices are rising—and that includes crypto gambling. More gamblers prefer to use cryptocurrency when token prices are increasing because that’s when crypto holders are generally the most willing to take risks—and when optimism about and confidence in digital assets is the highest.
Is the Stock Market Influenced by Crypto Volatility?
You may be wondering if crypto market fluctuations are influenced by the stock market. I own a mixture of digital assets and traditional securities like stocks, but not because cryptocurrency prices and stock prices are entirely independent.
Cryptocurrency market fluctuations can be influenced by the stock market, although the relationship is complex and not always direct.
Cryptocurrencies as an asset class have long been viewed as independent of traditional financial markets, although the correlation between digital asset and traditional security prices has fluctuated over time.
The price correlation between digital assets and traditional securities may increase if many institutional investors add cryptocurrency exposure—that’s because institutional investors control significant cash flows and may make policy-based investment decisions that span traditional and digital asset classes. Macroeconomic events can also increase the price correlation between digital assets and traditional securities.
The price correlation between digital assets and traditional securities may decrease if crypto holders react to news or events that impact only the blockchain or cryptocurrency sector.
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Crypto enthusiasts are generally delighted by every indicator that crypto is becoming more accessible to traditional market investors. But as digital assets become increasingly mainstream, their price movements are increasingly affected by the same economic factors that influence the prices of traditional securities.
How the Price of Bitcoin Influences User Behavior
Do you remember when the price of Bitcoin soared in 2017, and then crashed in 2018? I began writing about and investing in Bitcoin in 2017, and remember being fascinated by the dramatic price changes.
Let’s examine both the Bitcoin bull run of 2017 and the price crash of 2018 to understand how Bitcoin’s price movements can influence traders, investors, and institutions.
2017 Bitcoin Bull Run
Picture this—it’s 2017, Beyoncé is having twins, and the price of Bitcoin is rapidly rising. One bitcoin, which sold for around $1,000 at the beginning of the year, was worth nearly $20,000 by December 2017.
This massive price increase attracts plenty of attention. Here’s how individuals and organizations react:
- New investors flock to Bitcoin: The skyrocketing price of Bitcoin catches the attention of the general public, attracting a massive influx of new investors. Many people previously unfamiliar with cryptocurrencies start investing in Bitcoin.
- Speculative trading increases: Bitcoin’s bull run causes speculative trading to surge. Market participants increasingly buy Bitcoin with the expectation of generating attractive short-term profits.
- Investors diversify into other cryptocurrencies: Bitcoin’s price performance inspires many investors to diversify their portfolios to include other cryptocurrencies, hoping to profit from the next big winners.
- Institutional investors show interest: Previously skeptical, institutional investors begin to seriously evaluate and invest in Bitcoin at scale.
2018 Bitcoin Market Crash
Now imagine this—the year is 2018, you’ve added Bitcoin and other digital tokens to your investment portfolio, and the market value of Bitcoin is crashing. The Bitcoin price decline that began in early 2018 swiftly brought the token’s price down to below $7,000 by February of 2018.
How do you react? How do other crypto holders react? Let’s take a look:
- Many Bitcoin holders choose to sell: The Bitcoin price crash triggers a widespread sell-off by investors attempting to limit their losses. The immense selling pressure further reduces the prices of Bitcoin and other cryptocurrencies.
- Speculative trading declines: Bitcoin’s rapid price decline dampens investor enthusiasm and causes speculative trading to decrease as investors and traders become more cautious.
- Trading volumes decrease: Many investors withdraw from the market entirely, or trade less speculatively or frequently, resulting in reduced trading volumes.
- Investors de-diversify their crypto portfolios: Some traders and investors rebalance their digital asset portfolios to eliminate exposure to the riskiest and most speculative cryptocurrencies.
- Risk management strategies gain popularity: Many crypto holders who continue to actively participate in the cryptocurrency markets begin using risk management strategies such as submitting stop-loss orders.
- Institutional investors show reduced buying interest: Organizations wary of high volatility and regulatory uncertainty revert to limiting their exposures to this emerging asset class.
Coping with Volatility as a Cryptocurrency Investor
Price volatility is unavoidable as a crypto investor—and how investors and traders react to price changes can vary significantly. Buying and selling patterns may be opportunistic or not always rational, influenced by short-term price fluctuations rather than fundamental investment characteristics.
Crypto gamblers, too, have varied responses to market volatility, with rising cryptocurrency prices generally boosting crypto gambling activity.
Extreme price volatility in crypto markets is often driven by investors’ emotions—but that doesn’t make coping with ongoing market volatility any easier. Here’s how to participate in fluctuating crypto markets without losing your cool:
- Diversify your investment portfolio to manage risk
- Develop a long-term investing strategy—and ignore short-term price fluctuations
- Use risk management tools to limit potential losses
- Avoid impulsive investment decisions that are purely emotion-based
The Future Outlook
The cryptocurrency markets are likely to remain volatile as the asset class continues to evolve.
Technological innovation, in digital assets and broadly in web3, is continuing at a rapid pace. Institutional investors are increasingly entering the markets for digital assets—boosting the value and liquidity of many cryptocurrencies.
And regulatory uncertainty persists in many jurisdictions, causing the continued migration of cryptocurrency and blockchain platforms to geographic locations with clear rules for digital assets.
Cryptocurrency users and gamblers are still at the forefront of innovation—but mainstream adoption of digital assets is all but inevitable over time. Widespread use by both individuals and businesses, although likely to occur gradually, may significantly decrease cryptocurrency market volatility.
A new assortment of investor behaviors would certainly arise from a crypto market with stable prices.
