Introduction to Crypto Volatility: Everything You Need to Know
On Aug 18, 2020, Bitcoin rallied above the $12,000 mark, to attain what is its loftiest value in a year. Investors now only require more data to declare the digital currency free of its prior range. As the lookout for signs of an extended Bull Run kicks off, the crypto assets market is enjoying the return of the currency's legendary volatility, a feature that highlights its peril and promise.
As an illustration, in mid-March 2020, its prices fell to as low as $4,904 per coin. After two months, the token rose to the $9,000 mark, then in early August, Bitcoin shattered the $12,000 resistance level.
The coin has such roller-coaster prices that its values fell by $1,500 in a half an hour of trading on Aug 3. Bitcoin is a scarce resource that trades with high leverage in crypto exchanges.
These two factors significantly contribute to the buoyancy of its prices, which is the most important factor that drives all price action in the financial markets.
What Is Volatility?
In the absence of volatility, the price action of financial instruments goes flat. Without price instabilities, a dearth of fluctuations will kill off a market's trade opportunities. Volatility ensures that the Forex, crypto, and stock markets participants trade its assets in every direction for a grander return on investment.
In finance, volatility describes divergence in the traded price of an asset with a precise period. The price instability of tradable assets can be high, medium, or low.
The Forex market, for instance, has a low volatility index. However, it is the most liquid market in the world, so, despite its lack of intense price movements, traders can still make a quick buck by utilizing leverage or amplifying their trade sizes or frequency.
The stock market has lesser price buoyancy values than the digital assets market. Its price uncertainty values can be classified as medium with the S&P 500, for instance, trading at a 40 percent range in most of 2019.
Cryptocurrencies are largely speculative and very prone to the wildest of price swings. An investment asset is highly volatile if its price tag moves aggressively daily, as is the case of Bitcoin.
In 2017, Bitcoin rose from $700 per BTC value to $20,000 in a year. That is a 27,000 percent return rate in months. As more traders jumped on the bandwagon, the token's market destabilized.
From a high of $19,783 on Dec 17 2017, the BTC price plummeted by a third in a day, dropping to $13,800 on 22 December 2017. By February of the next year, the cryptocurrency had lost 50 percent of its value in 16 days, falling to $6,200 mark.
By the end of 2018, one BTC was worth $3,300.
Causes of Crypto Volatility
1. The Novelty of the Market
It has been 228 years since the signing of the Buttonwood Agreement that gave rise to the New York Stock Exchange on Wall Street. Currency or Forex trading, as it is known today, is as old as commerce itself.
Bitcoin, an idea of Satoshi Nakamoto, saw the light of day in 2008 making it a very new technology in the world of financial assets trading. Every new technology has a prolonged perfection and adoption period, whereby the risk of failure is high. The asset’s potential for adoption and future disruptions however gives it a speculative value in the market.
Most cryptocurrencies are new assets and do not have quantifiable solid metrics that can direct investors to their fundamentals. For this reason, they are highly prone to speculation and hype, which leads to high volatility and opportunities for high-risk trading.
In 2017, many traders jumped on the crypto trading bandwagon through pure speculation. At the end of the year's Bull Run, the asset’s values fell from market capitalization of $813 billion to a low of $100 billion.
The losses amongst traders were massive as most digital currencies lost up to 90 percent of their values. The value of an asset should be dictated by its adoption and utility, not FOMO.
However, crypto asset trading is highly driven by speculation because of a lack of legacy fundamental analysis data. This spectacle leads to high volatility in prices, making the trade both highly risky and rewarding as well.
3. Low Liquidity
Unlike the FX market, which has high liquidity because of the millions of traders that take part in it, the crypto assets sector is a low liquidity zone.
It is new, has fewer early adopters, and a lower trading volume that the forex or stock market. The low liquidity feature causes aggressive and sudden price fluctuations with large whale orders, for instance, kicking off an instant bearish or bullish price action.
As crypto-assets attract more traders, it will grow a buffer that minimizes this extreme effect of large orders and market manipulation.
4. Lack of Regulation in Trade
The novelty of crypto assets coupled with their nascent complex technology makes it much more difficult for authorities to regulate them.
Cryptocurrencies run on the premise of decentralization leaving them open to unsupervised trading and an influx of bad actors.
Pump and dump schemes can manipulate prices, making the asset trading unstable and highly volatile.
How Is Crypto Asset Volatility Measured?
The traditional method of calculating volatility involves measuring variance and the square root of the variance.
In Bitcoin and crypto trading, there are useful indicators that make these measurements easy for traders, since this digital asset is a credible indicator for the entire market at large. It also has the largest market share. Some of these indicators include;
a. The Buy Bitcoin Worldwide Bitcoin Volatility Index that measures the asset's standard deviation values. A rise in standard deviation implies that BTC is more volatile and its values are spread out.
b. The Bitpremier Bitcoin Volatility Index that tracks the price movements of BTC in a percentage context. Traders can use this index to check Bitcoin's 30 days to 252-day volatility recording.
c. The Bitgur Volatility Index calculates the volatility of the ten largest crypto assets by market capitalization. It uses a 0-100 range with higher numbers signifying high levels of volatility.
Benefits of Crypto Volatility1. Every price swing has profit potential, with volatility staving off stagnancy from the crypto-assets trading markets.
2. The heightened excitement and FOMO caused by asset volatility in crypto assets trading eliminate boredom. 3. It is a thrilling form of trading that captures many traders increasing liquidity
4. Digital currency price buoyancy gives rise to record-setting bull runs and crashes that give the apt trader a perfect trading opportunity.
Disadvantages of Crypto Volatility1. The wild price swings can lead to potential profit or losses
2. Price instability can also encourage negative trading emotions such as fear, uncertainty, and doubt (FUD) influence trading decisions and increasing negative outcomes.
CryptoAltum's Safety Trading Tips in Volatile Markets
Even with what crypto volatility has to offer, traders should tread carefully. In that case, we always recommend you to be:1. Be careful, always
2. Start with a low trading amount
3. Avoid the urge to jump in at every opportunity. Use trading strategies that ensure that you catch the right wave.
4. Manage your risk exposure
Sign up today with CryptoAltum and enjoy the best crypto trading experience on the MT5 platform. On offer is leverage of up-to 1:500. Combined with the industry’s lowest fees, traders have an advantage and remain ahead of the pack.
You can, therefore, make a maximum profit from the ongoing price volatility and our spreads are 500 percent less than that of our peers. We offer cold storage safekeeping of crypto assets and a straightforward account opening and funding process.
In our next article, we explain all about Bollinger Bands.
This website is not directed at any jurisdiction and is not intended for any use that would be contrary to local law or regulation.
CryptoAltum does not accept any clients under the age of 18.