How volatility and lack of liquidity are detrimental to Crypto investors

Cryptocurrency is evolving at a frantic pace. The overall market capitalization[1] of all the cryptocurrencies is $ 417 billion currently and is poised to hit the $ 1 trillion by the end of 2018. ICOs or Initial Coin Offerings are the smart new alternative to Crowdfunding where “coins” or “tokens” are issued to early investors in lieu of their investment. Coindesk reports that by April 2018, $6.3 billion have been raised through ICOs, making the figure stand at 118% of the funds raised in the entirety of 2017. Though the number of ICOs is just 59% of the total number of ICOs in 2017, the sheer volume of funds raised is huge. That’s the biggest sign of investors’ confidence in ICOs and companies that are leveraging blockchain technology to come up with innovative solutions to solve complex problems.

Happy tidings for crypto investors and they can start conducting all their transactions in cryptocurrency now — is that possible?

For now, the answer is a resounding NO.

Bitcoin, the oldest cryptocurrency ended 2017 at a price of $13,000 but in 2018 it has shed over 50% of that price at times. For a soon to be trillion-dollar market, the problem of volatility and lack of liquidity are a huge deterrent for new investors. Having said that, the ones who are already part of the crypto economy, also find it hard to stay invested. There are several factors that have caused this, and, in this article, we will investigate them while also suggesting how investors can tide over these challenges for long term profits through investment in crypto assets.

Liquidity is defined as the ease of conversion of an asset into cash, when required, without any difficulty or delay. In the crypto world, liquidity stands for the ease with which a cryptocurrency can be exchanged for another cryptocurrency or a fiat currency (like USD or GBP) for what its worth, without a discount. Low liquidity makes the market volatile with investors getting stressed and in panic mode to exchange their coins/tokens. As with any other commodity, simple demand-supply economics prevail, and rising demand causes spikes in the price. Conversely, when the liquidity is more, prices are relatively stable and price fluctuations are rare.

First things first: with the superior technology that cryptocurrency is built on, one can track the movement in prices minute-by- minute on any smartphone. With more traditional firms of investment like venture capital and private equity, tracking every 5 minutes has become possible recently. Crypto investors are bound to panic and be emotionally stressed with extreme swings in the prices of an asset that is called a fraud on the one hand and the currency of the future on the other.

Another factor is that the size of the cryptocurrency market is relatively quite small as compared to fiat currencies. Therefore, a miniscule change appears to have a pronounced effect on its price. Factor in the limited supply of cryptocurrencies and their skewed distribution, with whales holding disproportionately high amounts and consequently immense power to influence prices and you have the perfect recipe for volatility and lack of liquidity.

The stand of governments also, to quite an extent, affects the liquidity of cryptocurrencies. Though they are traded freely across the world, the measures taken by certain governments towards regulating cryptocurrency sometimes to the extent of banning its use have caused major disruptions and adversely impacted liquidity and caused great volatility in recent times.

The presence of strong and trusted exchange networks is another aspect which is required to boost liquidity. At present there are at least 50–100 trusted exchanges in the world; Bitfinex, Bitstamp, Coinbase and Bithumb being the more popular ones. Users can transact on these exchanges and safely convert their coins and tokens into cash.

Centralized exchanges have been around for some time and have obvious drawbacks. An increase in decentralized exchanges will help ease the liquidity situation by bringing forth the opportunity to holders of crypto currencies and tokens to liquidate their holdings freely and easily. Bdaq is another upcoming decentralized platform for pre-listing token liquidation of Ethereum (ERC20) tokens buying or selling.

Acceptance as a mode of payment across various networks is another factor that determines cryptocurrency liquidity. More than 370,000 vendors across 182 countries accept cryptocurrency as of September 2017, including major US players like Amazon, Dell, IBM, Microsoft, Apple’s app store and PayPal.

That said, volatility is what has attracted new investors and entrepreneurs to invest in cryptocurrency, because the yields have been stunning for early investors. There is no denying the fact that cryptocurrencies are here to stay, and should one choose to invest, there are over 2000 of them to choose from. For some investors who do not have the appetite for the roller-coaster ride that cryptocurrencies’ prices follow, investing in ICOs and blockchain based, self-executing smart contracts are the safer options. It is important though to not try to enter and exit immediately when you notice swings. Staying invested can help one ride the lows and end up on a winning note. The early investors of Bitcoin when it first started in 2009, reaped those benefits and are billionaires today for this reason.

Decentralization, anonymity and greater security are the greatest strengths of cryptocurrencies and though banks and financial institutions initially perceived cryptocurrencies as a speculative and risky investment, new thinking is taking over, and top leaders of the financial world are now joining the ranks of crypto investors. Entities such as Chicago Board Options Exchange (CBOE)[2] and the Chicago Mercantile Exchange (CME) introduced Bitcoin futures trading in December 2018 and Wall Street giants like Goldman Sachs and Barclays have started their own crypto trading desks. This is going to bring more credibility and legitimacy when it comes to perception about cryptocurrencies.

[1] https://smartereum.com/3223/cryptocurrency-market-valuation-to-hit-1-trillion-this-year-cryptocurrencypredictions-2018-fri-may04/

[2] https://cointelegraph.com/news/volatility-the-necessary-evil-of-cryptocurrency-and-how-to-handle-it