Why Numba Go Up & Down? A Tale of Crypto Volatility
Crypto’s price swings are, for better or worse, enormous. Those invested in crypto over the long term have lived through vertiginous falls in asset prices alongside market-confounding gains, with millionaires minted from tiny early-doors bags, and fortunes lost from one over-aggressive trade.
Bitcoin went up by over 2000% in 2017. Many coins have dropped 95% during the ‘crypto winter’ of 2018 — and these are assets which have survived, some of which happened to make new heights in the recent bull run. Coins rise or fall double digit percentages daily — and it’s not even newsworthy.
It’s the kind of volatility that, in years gone by, would have made any sane trader run for the hills. If the stock market moved like that, the world would be in chaos.
In crypto, though, it’s par for the course. Crypto investors regularly complain about assets only doing 2–5x during bull markets. It could indicate a new reality in how the upcoming cohort views asset price movements, and the expectations of a news-saturated generation.
Why Is Crypto Volatile?
The extreme volatility is due to some specific properties of the crypto market, alongside general market conditions at the start of the millennium. Some of the main reasons crypto is volatile include:
- It’s a new, still somewhat immature market
- The modern news-cycle is 24–7, as is the ability to trade
- Crypto is a less liquid market, with fewer institutional investors
- Whale coordination reportedly moves markets
- Volatility begets volatility as traders seek profits
Young Blood Runs Hot: Crypto Immaturity
Crypto is — in investment terms — brand new. Economic cycles tend to last a generation, and investment planners often talk of 20-year plans. By that (very rough, easily disputable) measure, crypto hasn’t finished its first cycle. The little one isn’t yet grown up.
After Bitcoin’s breakout success, Ethereum’s impressive growth, and the plethora of 100x or even 1,000x projects in the space, investors have stampeded into crypto in droves — and not always with appropriate due diligence. The market is exceptionally volatile because the technology is so new, and no one can say with any certainty which projects will be successful, while new innovations in the space get taken up by investors more aggressively due to a mixture of FOMO, ease-of-investment, and excitement.
This leads to consequent crashes when new projects don’t fulfil their early promise, or get superseded by better technology which is being developed every day, or are on the receiving end of a dollop of FUD.
Less Liquidity in Crypto
In crypto, liquidity is spread thin, and it is not as deep as it is in traditional markets. There are far less institutional bulwarks to asset price swings. The lack of buy and sell orders can send prices plummeting through break points quickly, while, on a DEX, a low liquidity pool is intrinsically more volatile as the formula underpinning the trades reacts more dramatically to movement.
A sudden draining of liquidity can brutally affect asset price, particularly if the asset is only traded on a few DEXs or CEXs in the first place. A lack of liquidity can mean one major investor can dramatically affect asset price when they choose to exit (or enter). A combination of low liquidity and speculative fever can make cryptos asset prices lurch wildly at the first hint of trouble.
News cycle and 24/7 Trading Hours
Those hints of trouble are, too, never far away. News is now 24/7. It affects the regular stock markets, but those are somewhat protected from irrational herd trading and panic by the fact the markets open and close during the working day. Yes, there are international markets. Yes, orderbooks do get primed before the start of play, and yes, there are expensive ways to execute stock trades on the weekend. Yet in general, there’s a bottleneck.
Crypto has no such impediments. Crypto is always open for business. The crypto markets move constantly, all around the world. This means the news cycle — the effects of which are bottlenecked by certain stock market strictures — is far more palpable in crypto, especially due to Crypto Twitter. A piece of important news will instantly swing the price, and that news can come at any time. Many traders have gone to bed with everything quiet only to wake up to both rags and riches on their return to the monitor.
Derivatives, Swing Trading, Futures and CFDs
Finally, crypto’s inherent volatility creates more volatility as the derivatives market for crypto is so juicy — and risky — for day traders. High frequency trading in crypto is rampant — as are trading bots — and their effect on overall asset prices are more pronounced because of the lack of liquidity in the market. Because volatility is expected, traders act in a more volatile manner, not closing positions they otherwise should and offloading when they otherwise shouldn’t due to fears about the continued seesawing of the asset price.
Crypto’s volatility is not going away for the foreseeable future. Until adoption is complete, there will continue to be new developments, new investors, and new markets created in the space that will make prices move faster than any stock market comparison.
Onomy Protocol is a layer-1 Cosmos chain powering a multi-chain & intuitive DEX that combines AMM liquidity pools with an order book UI facilitating market, limit, and stop orders, alongside FX markets via its stablecoin minting system, and multi-protocol asset management through the multi-chain Onomy Access wallet.
Originally published at https://coinmarketcap.com.