Bitpanda Mythbusters: Should We Fear Crypto Volatility and Speculation?

What are speculation and volatility, and are they so bad?

When it comes to money, emotion can often override judgement, making us more prone to pessimism. While concepts like speculation and volatility imply uncertainty and danger, there’s more to it than that. Let’s look at these fundamental concepts in more detail. Investopedia defines speculation as:

• “The act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.”

Volatility is described as:

• “The amount of uncertainty or risk related to the size of changes in a security’s value.”

The key common denominators here are the price fluctuation changes, and their extent and speed, as well as the mindset of engaging in activities that can produce potential above-average gains while equally acknowledging increased potential losses. Another key element is that both are associated with increased levels of risk. This is true, but it also depends on the context. It’s important to remember that speculation and volatility form part of many human activities, including financial markets, business ventures, and everyday life decisions. This means that they are not exclusive to the crypto market. Speculation and volatility are, in fact, inherent in investing regardless of the market or asset class. It is also important to consider what they are based on, such as the nature of the asset, new trends, economic situations, human psychology, etc.

What frequently falls outside the public debate, however, is the very important aspect of “creating opportunities". This is overlooked since the experience of pain and loss is more acute than the reward. These opportunities in the form of potential (and substantial) appreciation in value, which, if combined with risk mitigation measures, can offset initial risk and losses. This is basically the same as a business entering a new and uncertain market or offering a new product: if they succeed, it has the first mover advantage and others will follow, and if not, then they will suffer losses and lessons will have to be learned - this is why application of risk management is so important.

What are the Pros and Cons of speculation and volatility?

Typically, the claims about speculation and volatility of crypto-assets are one-sided. Not only do they portray the crypto market as risky, but they also often overlook, as mentioned, the concept of opportunity creation. Here are some opportunities and disadvantages:

Pros:

• Creating opportunities to beat inflation and preserve the value of the work: This encourages investors who would be less eager to invest in general if the return were equal to very low interest rates on bank deposits.
• Providing information: A signal for the investors regarding price, project performance, valuation, market identity or economic situation.
• Creating opportunities for investing and funding: Potential investment opportunities in new projects that drive watershed ideas (venture capital).
• Encouraging informed and calculated decision-making process: Prompting investors to do a proper risk assessment, due diligence and adopt prudential behaviour before diving into a new investment.
• Increased engagement: Improves the overall engagement in investing and opens up potential retail investments by evoking interest in new products.
• Financial education in practice: Crypto encourages people to explore monetary science and investment principles. Understanding the inception of crypto-assets requires studying the history of money and key financial concepts like gold value, interest rates, and inflation, highlighting the importance of financial literacy that will build and promote an investment culture over elevated spending.

Cons:

• Instability and increased risk due to higher price swings: more volatile markets can cause emotional distress and fear of a major loss. It is therefore important not to be governed by emotions but instead to understand basic market mechanisms and characteristics of an invested asset.
• Manipulation and scams: new markets, especially in new tech, are prone to abuse and unlawful action of greedy and dishonest individuals. Precautionary measures and prudence need to be carefully applied. Having an “I am not here to get rich quick” attitude can serve very well.
• Higher potential losses: Losses can be higher than in traditional markets, but these can be unrealised and temporary losses. The loss is only when you sell at a loss. If a long-term investment strategy is adopted, results show that, depending on the investment vehicle, patience and steadiness can pay off.

Although the cons can sound frightening, once again, it’s important to remember that there is always a risk even in a more established financial market (stocks, commodities). What is important for the investors is the utmost necessity of risk tolerance management, which should apply to any part of life. One way of approaching this could be to view some of these disadvantages as a ‘cost of entry’ with short-term pain points that need to be tolerated before receiving the overall benefits - the same concept that applies to many aspects of our lives, e.g. short-term pain in the gym for long-term health benefits.

The Harvard University case is a good example of a misjudged and unrealised opportunity due to the negative perception of the crypto market based on volatility, speculation and uncertainty. In 2018, Harvard University professor and economist and former chief economist of the International Monetary Fund, Kenneth Rogoff, opined that:

• “I think Bitcoin will be worth a tiny fraction of what it is now if we’re headed out 10 years from now...I would see $100 as being a lot more likely than $100,000 ten years from now.”

Interestingly, now it is reported that Harvard University invested around $117m into the Bitcoin ETF, exceeding its stakes in Google and Nvidia.

Are speculation and volatility only reserved for crypto-assets?

The short and simple answer is “no”. The only difference between the crypto assets and traditional instruments like stocks or commodities is the level of price fluctuations and susceptibility to market events that can impact the value. It is not surprising that the stock or commodity market is more mature and has a much longer history. This translates into - by and large - a smaller scope of volatility or speculation. This is not to say that traditional markets do not have higher speculative or volatile effects.

Consider, for instance, the investment by Venture Capital (VC) in new emerging businesses and markets, which is inherently risky due to the (usually novel) nature of the venture. There are no guaranteed returns, but a speculation in tech that can go either way. In terms of figures, between 70-90% of start-ups do not produce returns or fail. In addition, VC investments are highly illiquid while capital is often locked in for around 5 –10+ years - yet we still encourage investments in new businesses. Other assets that are speculative and volatile are penny stocks, IPOs, forex trading (speculating and arbitrating on fiat currencies), some equity indices, and certain high-tech stocks.

Let’s look at another example: playing the lottery and gambling are prevalent in modern society; they are definitely speculative, volatile and addictive. Yet these activities are not scrutinised or discouraged to the same level as the investments in crypto-assets. At least when investing in crypto markets, you invest in technology, potentially new development (but not always), while with the lottery and gambling, there is no underlying value, and it is ultimately pure speculation.

Will the crypto sector always be highly volatile and speculative?

The crypto market has become more stable over the past decade, but most assets still carry high uncertainty and risk. Much of the fluctuation stems from the fact that the industry is still burgeoning, with ongoing regulatory acceptance and developments, prevalent scepticism around new technologies, and abuse by bad actors. However, the volatility and speculation will likely continue to diminish over time as it becomes more mature; the capital flow or outflows will have less impact, being more stable and predictable, and liquidity will improve. This is already visible in the increased institutional adoption and is no different from other, more traditional assets and markets. It should be noted that even the most established assets and commodities, like gold, will fluctuate to some degree. Finally, methods measuring different volatility and speculation can also vary depending on representation (e.g., implied vs realised volatility). Therefore, we should also pay attention to methodologies, similarly to what we presented in the Bitcoin energy mythbuster.

Crypto-assets are becoming more stable

In the crypto market, we can identify assets that, even though still volatile, have a different technological basis and fundamentals that reduce fluctuation risk. Such assets have a strong chance of eliminating or, at the very least, limiting larger price swings in the long run. A good example is Bitcoin versus other projects (like altcoins or memecoins). Bitcoin, as a new asset class, is unprecedented in the history of the world, as its attributes enable it to become a scarce digital store of value. Bitcoin’s response to price swings (due to different market occurrences) has significantly changed over the years. An interesting fact here is that there have been more instances of the Bitcoin price quickly rising rather than swiftly dropping over time. In other words, although drops have been sizable, Bitcoin has been appreciating much more. Let’s have a look at some metrics.

1. Bitcoin (BTC) reduced volatility

The initial high volatility materially diminished over time (from over 200% to around 50-60%). At the same time, the opportunity (price increase) continued to rise in a way that sufficiently offset higher price fluctuations. And, even if Bitcoin drops more than 50% from its current price, this will be an opportunity to gain more exposure to the asset.

2. Volatility compared to the stock market

As of January 31, 2025 (Bloomberg,) Bitcoin volatility is approximately 54% vs. 15.1% for gold and 10.5% for global equities (here, volatility calculated as the annualised standard deviation of the last 1-year of daily returns). To put it differently, Bitcoin’s volatility is 3.6 times more than for gold and 5.1 times more for global equities. Notably, by comparing Bitcoin to high-volatility tech assets, it is evident that the gap has become smaller in recent years. Bitcoin's average annual volatility is only 1.09 times higher than Tesla's (32.54%) and 1.17 times higher than NVIDIA's (30.42%) (Forbes). There were even moments when the S&P 500 was more than or equal to Bitcoin’s volatility.

Unexpectedly to most observers, Bitcoin showcased growth in stability in relation to other assets - that was, interestingly, the case during the tariff trade wars (which are still on at the time of writing). If we take a closer look, between February 20, 2025 and April 8, the S&P 500 dropped 19% and recovered by September 3 by around 29%. BTC, in contrast, dropped about 22-24% during that period, while recovering by 46%. Moreover, on February 20, 2025, the crypto market cap was valued at $3.19T, dropping to $2.42T on April 9. At the time of this writing, it is valued at $3.87T (it reached $4.17T on August 14).

3. Gold prices fluctuated in the past

By exploring the historical performances of different assets, we can see that they also experienced higher price discovery before settling down and becoming less volatile. Gold is a good example of this. The price of gold dramatically rose after being de-pegged from the US dollar in 1971, and individuals could freely accumulate it after a decades-long ban. 

What to do - stay away or prudently engage? 

As mentioned, any investment is by default risky and uncertain. Investors need to educate themselves, be cautious, apply risk mitigation strategies, define their risk tolerance, and be conscious about the characteristics of a product and market they are entering. Investors need to carry expectations of both failure and success. Moreover, emotional discipline is very important so as not to fall into the “get rich quick” mindset. Such an approach will help to maximise success and minimise losses, and it should be encouraged. 

Once we move past the noise and examine the 'doomsday-like' claims about harmful volatility and speculation, it becomes clear that the facts and objective information are substantially different from what the public sees. As we saw, there are pros and cons of elevated volatility and speculation. However, if performed correctly, it can bring more positives than negatives. By bluntly discouraging or prohibiting investments in emerging assets, there is the potential for harming the market in the long run, as well as investor opportunities and entrepreneurship growth. 

Let’s consider this myth demystified! 

Disclaimer

This article is distributed for informational purposes, and it is not to be construed as an offer or recommendation. It does not constitute and cannot replace investment advice. Bitpanda does not make any representations or warranties as to the accuracy and completeness of any information contained herein. Investing carries risks. You could lose all the money you invest.