By Dr. James Morrison - Economics researcher exploring Bitcoin through the lens of monetary history and Austrian economics.

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The Volatility Question: Why Bitcoin and Other Cryptoassets Experience Extreme Price Oscillations

The bloody phone won't stop ringing every time Bitcoin moves more than 5% in either direction. Friends who haven't spoken to me in months suddenly remember I exist. "James, what's happening? Should I buy? Should I sell?" As if I've got some crystal ball tucked away with my economics textbooks. I don't, obviously.

From a monetary theory perspective, the volatility we observe in Bitcoin and other cryptoassets isn't particularly surprising or mysterious. It's rather predictable when you understand what we're actually looking at — the messy, chaotic birth of a new monetary system happening in full public view, with price discovery occurring in real-time on global markets that never close. Nothing like this has happened in human history; gold emerged over thousands of years, fiat currencies were imposed by decree. Bitcoin just... appeared one day. And we're watching it evolve.

The price volatility stems from several interconnected factors:

First, liquidity remains relatively thin compared to traditional markets. Bitcoin's market cap hovers around a trillion dollars on good days — a drop in the ocean compared to global equity markets (roughly $100 trillion) or bond markets ($130 trillion). When large players move in or out, the ripples become tsunamis.

My colleague at the university — brilliant chap, terrible investor — bought £50,000 worth of Bitcoin last month without realizing what a market order on a weekend might do to a smaller exchange. Moved the local price nearly 2%. Amateur.

Second — and this is where Austrian economics provides valuable insight — we're witnessing Mises' regression theorem playing out in accelerated fashion. Bitcoin is transitioning through the stages of monetisation: from collectible curiosity to speculative asset to potential store of value, and perhaps eventually to medium of exchange and unit of account. Each phase involves different adoption patterns, user expectations, and price behaviours.

This transitional state creates profound uncertainty about Bitcoin's ultimate utility and value. Is it worth nothing, as my central banker friends insist over their expense-account lunches? Or might it eventually capture a significant portion of the global store of value market? The difference between these outcomes is several orders of magnitude in price.

Consider the broader context: if Bitcoin were to capture just 10% of the global store of value market currently dominated by gold, sovereign debt, and real estate, its price would need to increase substantially from current levels. Conversely, if it fails as a monetary innovation, its fundamental value could approach zero. With such a wide range of possible outcomes, volatility is inevitable; the market is constantly reassessing probabilities as new information emerges.

Third factor — and I've been boring my students with this for years — is the inherent reflexivity in the Bitcoin market. Price movements create narrative shifts, which drive further price movements in the same direction. When prices rise, the "Bitcoin is becoming a legitimate asset class" narrative strengthens, institutional interest increases, and retail FOMO kicks in. When prices fall, the "Bitcoin is a failed experiment" narrative gains traction, weak hands sell, and the cycle reverses.

This echoes the principles of Soros's theory of reflexivity, though I suspect George himself hasn't fully appreciated how perfectly Bitcoin exemplifies his concept. I tried explaining this to him at a conference once, but he seemed more interested in the canapés. His loss.

The halving cycles — those programmatic reductions in new supply every four years — exacerbate these boom-bust patterns. The resulting supply shocks occur against a backdrop of highly variable demand, creating the perfect conditions for cyclical behaviour. The academic literature on this is still embarrassingly thin; most economists can't be bothered to understand the protocol mechanics before dismissing the entire phenomenon.

There's also the small matter of leverage. The cryptocurrency market structure allows for absurd levels of leverage — 100x in some cases — which is like giving loaded firearms to children. These excessive leverage provisions amplify price movements and trigger cascading liquidations, particularly during periods of low liquidity.

I was explaining this to my wife over dinner last night, and she asked the obvious question: "If everyone knows leverage causes crashes, why do the exchanges allow it?" The answer, which didn't improve her appetite, is that exchanges profit from liquidations. They're the casino, not your financial advisor.

Time preference plays a crucial role too. Bitcoin attracts participants with wildly different time horizons — from high-frequency trading algorithms operating in milliseconds to "hodlers" thinking in decades. This creates natural market tensions and divergent reactions to news events.

The market is further complicated by regulatory uncertainty. Every utterance from a financial regulator or central bank official can send prices soaring or plummeting. The SEC's schizophrenic approach to crypto regulation has been particularly destabilizing; one day they're approving Bitcoin ETFs, the next they're launching enforcement actions against the entire industry.

History teaches us that new monetary technologies typically experience extreme volatility during their adoption phase. The early days of gold standards and fiat currencies were hardly models of stability. The difference is those transitions weren't live-streamed with 24/7 price feeds and trading bots.

Will Bitcoin eventually stabilize? Probably, if it continues to gain adoption and market depth. The economic implications are profound either way. We're witnessing a monetary experiment playing out in real-time, with billions of people able to participate directly.

My coffee's gone cold while writing this. Always happens. Anyway, I've got to prepare for tomorrow's lecture on central banking, which feels increasingly like teaching ancient history. The students always ask about Bitcoin, and I always tell them the same thing: understand the monetary theory first, then decide if you're willing to stomach the volatility. Most aren't.

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Originally published on LearnOnChain Reading time: 5 minutes