Volatility in the price of cryptocurrencies such as bitcoin and ethereum frequently makes the news, with rises and falls of 40pc or more in a matter of days not uncommon. But what is actually causing the rollercoaster ride? Here are some of the top culprits.

1 Regulation

As with any new type of investment, the law is racing to keep up with the development and use of cryptocurrencies. Questions are being asked in different countries and jurisdictions over whether they should be recognised as units of currency, tightly regulated or even made illegal, and new decisions are being made and changed all the time.

Prices tend to react quickly to any decisions regarding cryptocurrency regulation. For example, when Japan announced that it was legalising bitcoin in April 2017, the price hit $1,130, rising nearly 3pc in a day.

But when regulators crack down this also hits cryptocurrencies hard. A particular culprit has been the Chinese market, mainly because it is so large.

China has repeatedly cracked down on cryptocurrencies, with a market crash following most announcements. For example, in February this year, China blocked all websites relating to trading in the currencies, prompting an immediate 15pc fall in bitcoin and 20pc drop in ethereum. Earlier bans of initial coin offerings (ICOs) in the country had a similar negative impact on their value.

Of course, cryptocurrencies are not the only investments vulnerable to regulation. Shares in companies frequently fall as a result of government decisions that affect their businesses or regulatory crackdowns on activities.

For example, when the Financial Conduct Authority, the UK regulator, announces that it is reviewing a sector, the shares often fall, and tax decisions affecting different sectors of the economy can revive share prices. With cryptocurrencies, though, the swings tend to be bigger.

2 Current affairs

As well as regulation, current affairs that seem to have nothing to do with cryptocurrency can have an effect on the share price. Cryptocurrency is often seen as an alternative to what is known as “fiat” currency – that is, currency where the value is backed by the government that issued it.

So when investors lose their confidence in a fiat currency because of economic or political events, they can turn to bitcoin or its rivals, pushing up the price.

Some experts believe that cryptocurrencies could replace the ownership of physical gold as a “safe haven” asset – somewhere to turn when the going gets tough.

Tom Lee, founder of Fundstrat Capital, thinks that millennials will use cryptocurrency as a replacement for gold, although the World Gold Council, perhaps predictably, says that crypto is too volatile for this. Nonetheless, when global politics looks rocky, we can expect to see cryptocurrencies rise.

3 Speculation

Cryptocurrency investors who lived through the dotcom boom will know all about how speculation can push up the price of an asset or deflate it just as quickly.

Speculative investors hope to make money out of cryptocurrencies, but may buy and sell quickly, adversely affecting the market or causing short-term swings. Investors talk particularly about “whales” – investors with very large amounts of a given currency, whose speculative trades can have a huge impact on the market.

4 Hacking

From bitcoin’s beginning to the proliferation of new currencies today, hacking has remained a problem for cryptocurrency investors. Every major hack into the system, or into cryptocurrency exchanges or wallets, has provoked a price crash. Recently, an attack on the cryptocurrency exchange Binance caused a 10.8pc crash in a matter of minutes.

While cryptocurrency technology gets ever more sophisticated, the hackers do as well, so these adverse events seem likely to continue.

5 New currencies

It’s not quite VHS or Betamax (for those of you who are old enough to remember the age-old video cassette debate) but it seems unlikely that the world requires quite as many cryptocurrencies as there are at present.

So as one becomes popular, money flows into it from other currencies, affecting their price. Meanwhile, new currencies are launched every day, which can have a diluting effect. Careful research is needed to ensure you pick a winner.

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