What is crypto volatility? Exploring causes of volatility and strategies to manage it

Crypto trading has become a popular way for people to grow their funds, but it's not without its risks. Before you start trading, it's important to understand the potential risks and how to manage them.

In this article, we 'll explore one of the key risks of crypto trading — market volatility, looking at what external events cause volatility and how you as a trader can navigate future unpredictability in the crypto markets. By the end of this article, you should have a better understanding of what is volatility in crypto and how to manage it.

What is market volatility?

One of the biggest risks associated with crypto trading is market volatility. Cryptocurrency prices can fluctuate wildly and rapidly, making it difficult to predict the future value of your positions. This can lead to significant losses if the market takes a turn for the worse.

For example, in December 2017, Bitcoin reached an all-time high of nearly $20,000, only to drop to around $3,000 just one year later. This level of volatility can be a major challenge for crypto traders. It's important to understand that crypto markets could be speculative and influenced by a variety of factors, such as regulatory changes, news events, and market sentiment. These factors can make it difficult to predict the future value of your holdings and increase the risk of losses.

What causes crypto market volatility?

The crypto market's size and growing mainstream adoption mean that today, many different factors can cause volatility — creating a complex landscape for traders to monitor and make sense of.

Policy

Shifts in the political sphere have shown themselves to influence crypto markets today, as digital assets have now become a major talking point on the campaign trail. This was evident during the most recent U.S. election in 2024, and the months following it. In November 2024, following the news that pro-crypto candidate Donald Trump had secured a return to the White House, bitcoin's price jumped nearly 8% to reach a new all-time high above $75,000. By the time Trump took office on January 20, 2025, BTC had surged to over $109,000 as traders anticipated possible crypto-friendly executive orders. Many traders now look to political leaders for a steer on the market's potential success in specific jurisdictions, as their policies directly impact regulation and therefore the opportunities crypto companies have to reach new customers and boost adoption. As politicians act, crypto traders typically react, creating volatility in the markets.

Regulatory developments

Because the crypto regulatory picture is still emerging globally, developments to laws — whether positive or negative for the industry — can add to volatility. Although crypto advocates usually champion decentralization, the industry remains under the influence of regulatory oversight that exists to protect individuals and their funds.

Favorable regulation can, for example, lead to greater institutional adoption as firms grow comfortable gaining exposure to crypto markets. On the flip side, a regulatory crackdown can create a bullish environment, leading traders away from crypto.

Macroeconomic shifts

Past price action suggests that macroeconomic factors also impact crypto market volatility. More specifically, many crypto traders will keep a close eye on the performance of tech stocks, as past history has suggested a correlation between the two markets. For example, on Tuesday 25 February, 2025, crypto prices experienced a sharp decline on the news that Nasdaq futures data had pointed to losses in technology stocks. BTC fell to a three-month low below $89,000 as a result, while ETH slid by more than 11% to below $2,340. Some believe the correlation between tech stocks and crypto derives from both being seen as high-risk assets. As a result, price action for tech stocks can trigger a similar response from crypto as traders react in kind.

Similarly, the crypto market saw a shift in sentiment during early 2025 as U.S. President Trump set out plans for various tariffs placed on goods from China, Mexico, Canada, and some European nations. The move created a risk-off environment, causing some traders to move their funds away from crypto and towards assets that could be considered safer.

Strategies to manage market volatility

Despite the risks associated with market volatility, there are strategies you can use to manage risk and potentially minimize losses. Some of these strategies include:

Educate yourself

Before you start trading, it is important to educate yourself on the crypto market and the different coins and tokens available. This will help you to understand market trends and signals and make more informed trading decisions.

Diversify your portfolio

Diversifying your portfolio by trading a variety of coins and tokens can help to reduce the risk of losses. This way, if one coin performs poorly, your overall portfolio may still be protected.

Use take profit and stop loss (TP/SL) orders

TP/SL orders can help to limit your losses or take profit by automatically selling your positions when they reach a certain price.

Don't chase quick gains

Don't let the potential for quick gains cloud your judgment. It's important to stick to your trading strategy and not to make impulsive decisions based on the potential for short-term earnings.

The final word

Although crypto trading can be rewarding, it can also be challenging to navigate. Understanding the risks associated with market volatility is crucial to making informed decisions and potentially reducing the risk of losses.

By staying informed on market trends, diversifying your portfolio, setting TP/SL orders, and sticking to your trading strategy, you can better manage market volatility and maximize your chances of success in the crypto market.