Facts About the Volatility of Bitcoin and Other Cryptocurrencies
There is no need of any introduction now for the names Bitcoin and Cryptocurrency as these have turned out to be a new asset class for storing wealth and are considered to be a perfect vehicle for the modern world to protect their purchasing power.
Bitcoin has been drawing the attention of investors with potentially huge rewards and scaring others as well with equally driving big risks. However more than ever, the fans and investors around the world are talking about this magical digital currency. But just like the old man says ‘there are always two sides of the coin’ — some people are optimistic about Bitcoin and cryptocurrencies while others are pessimistic.
Optimistic because people generally prefer to talk highly of things they are invested in following to the popular saying “Put your money where your mouth is” — this is perfect for the early adopters and investors of Bitcoin and other cryptocurrencies.
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On the other hand, people are pessimistic because Bitcoin and the world of cryptocurrency are very volatile in nature. Some also referred it as a Ponzi scheme where no one will benefit. When you get to know about Bitcoin and other cryptocurrencies closely, you will agree that the crypto world is highly volatile but say it is a Ponzi scheme may not satisfy. This is because anything that trades in a free market without regulations or in a decentralized network will be highly volatile. And, Bitcoin, as well as other cryptocurrencies, are no exception to that.
What Does Volatility Mean in Bitcoin and Other Cryptocurrencies?
Volatility in simple terms is a measure to know the variance of the price of a certain financial instrument within a stipulated time period. The volatility of the cryptocurrency space is commonly associated with the risk factor of the instrument. A highly volatile instrument is considered as riskier whereas a less volatile instrument is considered lesser risky.
Seeing the definition of volatility it can be said that volatility of Bitcoin and other cryptocurrencies is important to understand clearly if you are going to invest or trade in this digital currency world.
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The volatility of Bitcoin and other cryptocurrencies is a rate at which the price of it increases or decreases for a given set of returns. It is measured by calculating the standard deviation of the annualized returns over a stipulated time period. The end result of the same shows the range to which the price of a security may increase or decrease. Confused? Let’s make it simpler to understand. Volatility in the Bitcoin and Cryptocurrency world is no different from the finance world.
Volatility Index of Bitcoin since 2010:
The huge price changes measured against stipulated time is termed as volatility in Bitcoin and other cryptocurrencies world. Many of the people out there referred it as stability and say the market of cryptocurrencies including Bitcoin is highly unstable.
For those who have been associated with the crypto, space can understand the reason behind it better. The cryptocurrency world is volatile because it cannot be controlled and therefore would continue to trade in the free markets frequently.
Why Bitcoin and Other Cryptocurrencies Market are so Volatile in Nature?
There are numerous reasons to justify why this market is so volatile in nature and some of which are mentioned below.
No Intrinsic Value:
Despite the sized valuations, Cryptocurrencies including Bitcoin don’t sell a product, employ thousands of people or earn revenue. They generally don’t return dividends and just a tiny amount of the total value of the currency goes into evolving it because of which it is hard to value.
Lack of Regulatory Oversight:
Cryptocurrencies including Bitcoin is a worldwide recognized and acknowledged phenomenon. While governments are clamping down on this industry, regulation is still in its early days. With limited regulation on this market, manipulation introduces volatility and discourages institutional level investment as a large sum of the fund has no assurances that the capital is truly secure or protected against bad actors.
Lack of Institutional Capital:
While it is indisputable that some pretty impressive venture capital firms, hedge funds, and high net-worth individuals are both fans of and investors in the cryptocurrency world, as a segment, most of the institutional capital is still on the sidelines. Most of the banking heads also admit that there’s some validity in the crypto space, but have yet to commit significant capital or participation publicly.
Thin Order Books:
Cryptocurrencies investors are educated to never keep coins on an exchange this is because there is a high risk of getting hacked. As a result, most of the tradable supply is not on an exchange order book but in off-exchange wallets. On the contrary, almost all the tradable stock of a publicly listed firm is transacted on a single exchange. Because of the capacity for large traders to move the cryptocurrency market in either direction and implement fruitful strategies to encourage this, volatility mark of the Bitcoin and other cryptocurrencies goes up.
Short Term vs. Long Term:
If you invest in something that will hit the maturity level when you are 60 years old, then you are probably less concerned about the daily or even yearly price movements of the same investment. This makes you less likely to trade it. Cryptocurrencies including Bitcoin cannot be bought while you are retiring from accounts and are usually unreachable to financial advisors and retail brokers, so an entire ecosystem of investors is left out.
So, how you are dealing with this volatility? Do let us know through your valuable comments. Keep visiting!
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