Why is cryptocurrency volatility such a big deal?
When discussing the crypto market, people often pay attention to its high volatility. For some volatility is a scary part of investing and buying ‘the future of money’. For others, it is a chance of getting hilariously rich. So why is cryptocurrency volatility such a big deal? Is it good or bad? Today we will try to explain it. What does volatility mean?
In the simplest terms, volatility is a mathematical tool or index by which we measure the price movements over time for a traded financial instrument or asset.
Usually, the volatility of cryptocurrencies is calculated within a specific period: a week, a month or a year. On the basis of monthly or yearly volatility, it is already possible to draw some conclusions and make forecasts on trading strategies.
The rates of any of the assets, including crypto are rarely stable. It is usually influenced by demand and supply from ordinary customers and investors, traders, economic and political situations and so on. Of course, compared to traditional assets, the volatility of cryptocurrencies is really high. The average annual volatility of fiat currencies usually does not exceed 3–4%. On the other hand, for example, is Bitcoin which experienced massive growth in 2017, growing from $700 to almost $20,000. That’s a staggering 27,000% rate of return in merely 12 months.
So what are the main factors causing the volatility in the crypto world?
- Lack of regulation.
All fiat currencies are supported by governments, which simply will not allow them to fall or rise in value for no apparent reason. Cryptocurrencies are decentralized and are not supported by any structures, which causes certain changes in their rates.
- Not tied to physical values.
For example, the exchange rates of many currencies depend on the minerals produced in the country (like oil or gas), as they make up a significant part of exports. The fact that cryptocurrencies are not tied to tangible values causes a certain dissonance in some minds. It is worth mentioning that some crypto coins are backed by real-world currency and traditional assets (for example, Tether which is tied to the USD and some other digital coins).
- No real value.
If the approximate value of corporate shares can be calculated by specific indicators of their activities, unfortunately, there are no such tools in case of digital currencies. In fact, they exist in a kind of a vacuum, and sometimes their rates change for unclear reasons.
- Infant market.
A young market backed by new technology is much more volatile than traditional investments that are mature and have been time-tested. New technologies take time to be perfected and adopted by the general masses, and there is a high risk of failure since there are many things that can go wrong.
The cryptocurrency has often been seen as a hotbed for speculation, which induces market instability. This creates an environment filled with tremendous risks.
As you can see volatility is an important aspect of cryptocurrencies, but actually, it is a double-edged sword.
Almost everyone speaks about the volatility of crypto coins in a negative tone because, in the traditional economy, high volatility is more of a negative than a positive indicator. However, the volatility of the cryptocurrency world has its own advantages. Mainly for traders in the crypto market, because one transaction can bring lots of profit. Thanks to this, many traders will continue entering the cryptocurrency market. Also, high volatility increases trading volumes and ultimately contributes to the popularity of crypto coins.
On the other hand, it, of course, has disadvantages:
High risks. Simply put, if the currency rates are swinging so much, where is the guarantee that one day it will not fall to the minimum values? These risks push business away from crypto transactions.
Unpredictability. Nowadays it is very difficult to say how much and why the crypto rate will fall and grow.
The crypto market is still trying to find its way. No doubt that cryptocurrencies will become more widespread in all spheres of our life. Nowadays, developers are trying to solve the problem of volatility by creating Stablecoins. But it would be a stretch to say that these alternative cryptocurrencies will be the entire future of cryptocurrencies. Probably after the recognition at the state level and the protection of investors participating in the ICO, longer-term players will start entering the crypto market and the volatility of rates will decrease.
How are you dealing with the volatility of crypto coins? Let us know your thoughts in the comments below!
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