Volatility In The Cryptocurrency Space
Friend or foe?
The world of cryptocurrencies is widely known for its volatility. Wild market swings are so unpredictable that many consider this new asset class as a very risky endeavor to store one’s wealth as it is full of uncertainties and doubts. Prices are highly speculative and can change in an instant and, therefore, reserved only for the seasoned trader, and not recommended for the weak of heart.
But on the other hand,
While others are pessimistic about it, the crypto space is very promising. Once understood, the crypto market can be tamed to work in one’s favor provided you are doing your own research and keenly educating yourself about crypto’s inner workings.
What is Volatility?
Legacy finance defines volatility as the statistical measurement of the dispersion of the price of an asset. The extent of fluctuation in a given time sets the volatility of an asset’s price. Any rapid chart price movement on a daily basis can be considered volatile. Highly volatile assets aside from cryptocurrencies are forex, stocks, and derivatives. Examples of low or non-volatile assets include gold, cash, savings, and government bonds. They are stable whose prices do not fluctuate that much.
What Causes Volatility?
Vital factors contribute to the instability of the cryptocurrency market that causes asset volatility.
1.The market is still in its infancy
New technologies run the infant market making it more volatile than the traditional market which has matured over time. New technologies still need time to be perfected and undergoing experimentation before achieving stability, so that mass adoption may take longer before proving itself a reliable investment vehicle. Without solid and quantifiable metrics to rely its fundamentals on, the infant market’s value will largely be based on speculation, perception, hype, disruptive force, and adoption.
2. Liquidity is low compared to other markets
Liquidity is described as the ease or difficulty of selling or buying an asset in the open market. A highly liquid market involves the active participation of buyers and sellers that would reflect a high volume of transactions. When the market is still in infancy, expect low transaction volumes that contribute to the low liquidity of an asset. Stock markets have high transaction volumes belittling most asset values in the crypto market.
A low liquidity market can easily be subject to wild fluctuations since even one single order can be large enough to instantly crash the market price or to send it soaring to all-time highs. This means that a low liquidity market can be manipulated and subject to a high degree of volatility.
3. The market is unregulated
Being nascent, decentralized and open-sourced technologies are difficult to regulate even owing to their cross-border character. Without regulations, it can become a hotbed for fraudsters and thieves that are out to manipulate the unsupervised market. An unstable crypto environment can cause panic that leads to more volatility as it is susceptible to sentimental news and subjective information.
4. The market is highly speculative
Speculation drives the value of an infant market without regulations. In normal cases, an asset’s value depends on its utility and adoption. Without quantifiable metrics, a coin or a token’s value is speculated based on its use cases, adoption, and traction. A speculative market renders it unstable and risky, resulting in high volatility.
Is There Anything Good That Can Come Out Of Volatility? There are different strokes for different folks. Meaning, it depends. There are investors and traders who shy away from high-volatility investments as they are more into preserving their wealth and are looking for stability. Others who are into the cryptocurrency market can be marked as risk-takers. Volatility can be a friend or an enemy. That is why anyone who wishes to enter the market should seriously consider the above-mentioned factors before engaging in the volatile crypto environment. Also to be studied that affect volatility are security breaches, taxes, inflation, and new regulations being introduced. All that matters is learning how to manage risks and to invest only what you can afford to lose. In the end, mastering the crypto environment can cause life-changing profits one could have never imagined.
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