It does not take long for a new cryptocurrency investor to realize that the crypto market is very volatile. Subject to harsh swings even within a single day, crypto markets have made fools of even the smartest speculators on market movements. If you have a better understanding of how these market shifts occur and why, your chances of making winning trades increases.
Before we get into those reasons for volatility, let’s look a little closer at the subject of volatility and what it means.
Defining Volatility / Crypto RollerCoaster!
In financial markets the simplest definition of market volatility is the fluctuations in the price of an asset. An asset can be relatively stable, such as gold or fiat currency. Other assets can be more vulnerable to price fluctuations such as FOREX and cryptocurrency.
The second component in defining volatility is time. Low volatility asset classes are those which hold their value over longer periods of time in a stable pattern. Whereas the value of Bitcoin can rise or fall hundreds of dollars in a single day, the price of gold may only move less than $1 over a period of weeks or even months in trading.
Putting Crypto Volatility in Perspective
In 2017 the stock market was enjoying one of its least volatile years in recent memory. It has been decades since anything even came close. Those who used to depend on day trading the stock market are finding their job much harder as technology improves. Computer algorithms are now able to forecast market movements in milliseconds. With more traders using this type of setup to get in the game, the low volatility of the stock market becomes even harder to conquer.
In contrast, 2017 was among the most volatile for the cryptocurrency market. Bitcoin went on a massive bull run, altcoins flourished and faded, and big swings made it possible for short-term traders to make huge profits. The thing about market volatility is that it can provide opportunities to make money in any type of market for the wise trader.
When many people first come to the cryptocurrency markets to trade they are unprepared for how volatile the market is. They jump right in with both feet and are soon drowning in a sea of trading losses. Why is it that the cryptocurrency market is more volatile than the market for any other asset class? Here are some potential answers.
1 – Absence of Regulatory Control
Governments today are making a stronger effort to crack down on cryptocurrency and establish some type of regulations that are governed by financial institutions like the Securities and Exchange Commission in the United States. The problem is that cryptocurrency is still very young, and attempts to regulate the market are even younger.
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The presence of limited regulation increases the chances for market manipulation. This, in turn, makes institutional investors wary and unwilling to participate,which leads us to the next reason for market volatility.
2 – Limited Institutional Capital
We are starting to see some large venture capital firms and hedge funds get involved with cryptocurrency. There are also individuals with high net worth that are supporters of Bitcoin and other cryptocurrencies that are investing. But these sources of capital are still limited. The mainstream institutional capital of the world is still held by those waiting to see what Bitcoin is ultimately going to do.
You have big banking leaders that are willing to concede that crypto is changing the financial landscape, but they are not willing to commit any large sums of capital. One of the sources of this type of capital is known as a trading desk. Trading desks buy on behalf of investors or mutual funds, and their presence can help to reduce the volatility in the cryptocurrency market.
3 – Limited Exchange Control
Another thing we see is that investors typically do not park large amounts of crypto at a cryptocurrency exchange. They are too worried about hacks, and rightfully so. Instead the vast majority of digital assets are held in crypto wallets that are kept off-exchange. Think about stocks where almost all assets are kept by an exchange. It is much harder for a large investor to move the stock market with a single trade.
With crypto, not so much. The crypto trader who holds 100,000 tokens of an altcoin in an off-exchange wallet can suddenly decide to put those tokens in play. A sudden market dilution or heavy trade can affect market volatility.
4 – More Short-Term Trading
In the crypto markets you have individuals that are more inclined toward short-term trades. Investors in the stock market are accustomed to buying and holding stocks for growth. A large investment can remain the same family without being bought or sold for over a hundred years in some case. Investors in crypto, on the other hand, are trying to make the most of positive swings in a short-term sense. They want to make a trade and get out with a profit.
5 – Speculation
Gordon Gekko said it best. The mother of all evil is speculation. Trying to guess where the market is headed is very difficult in the young cryptocurrency marketplace. No one knows for sure if the value of Bitcoin will go to the moon or if it will come crashing back to earth. There are plenty of people on either side of the fence, and that helps to drive crypto market volatility.
Is Volatility in the Crypto Markets Going to Decrease?
This is a hard question for anyone to answer with any measure of accuracy. The tendency among most financial analysts is to say that crypto market volatility will decrease as the crypto market grows and Bitcoin and other tokens continue to define themselves as an asset class. Until that happens, be prepared for heavy volatility when you invest in crypto.