Does Crypto Market is Volatile?
Unlike traditional currencies such as the Euro and Great British Pound, which tend to fluctuate between 0.5%-1% on any given day, cryptocurrencies show large fluctuations sometimes shifting from around 5-10% per day. This volatility is important as purchasing and selling currencies at the correct times can lead to big profits for traders. It’s not uncommon to see trading periods where a catalytic event can trigger price fluctuations around 50% and in some major cases all the way up to 200-300%. Why is this asset class more volatile than any other liquid asset in the market?
It is hard to pinpoint why cryptocurrencies are so volatile with one exact reason, but rather a few which have been explained below:
1. No intrinsic value
Most cryptocurrencies don’t sell a product, earn revenue or employ thousands of people. They generally don’t return dividends, and just a tiny amount of the total value of the currency goes into evolving it. Because of this, it is extremely difficult to value. How do we know if it is fundamentally overbought or oversold? When is it a good value or overpriced? Without any fundamentals to base this information off of, we can only rely on market sentiment, often dictated by the media that makes money on viewership.
2. Lack of regulation
The lack of regulation in the cryptocurrency space can play a factor in the volatility of the price. This low level of regulation allows for market manipulation. Often done by placing orders with the intent to cancel, whereas in a regulated market such as the foreign exchange placing fake orders is illegal. Creating these false orders can lead to a misrepresentation of market behaviour which can cause volatility with the false orders encouraging uncertainty.
3. Supply and demand
Another reason the price of crypto is so volatile comes down to simple Economics. When the demand for an asset increases quicker than the supply, the price is likely to rise. We saw this come into play with Bitcoin during the Christmas period of 2017. The demand for Bitcoin was widespread due to the profit being made by traders throughout the year and the supply could not keep up with the massive uptake, which led to the price reaching an all-time high of around $20,000.
4. Lack of institutional capital
While it is undeniable that some pretty impressive venture capital companies, hedge funds and high net-worth individuals are both fans of and investors in crypto, as a segment, most of the institutional capital is still on the sidelines.
At the moment there has been little to no movement on a Bitcoin ETF or Mutual Fund, which is predicted to introduce much needed institutional volume into the cryptocurrency markets.
5. Market size
The cryptocurrency market is only roughly 10 years old and still an emerging market. The total size of the cryptocurrency market is currently $250B. Although this is a huge amount, it is a small figure when compared to the foreign exchange market which totals around $5T per day. This is why the foreign exchange market is able to keep stability even when there are massive movements in the market. The same cannot be said about the cryptocurrency market. This allows a few big traders who hold a lot of currencies (referred to as whales) have the ability to shift the market by making huge transactions.
When will volatility decrease?
Over time, we can expect more regulation, a greater diversity of investors, and a more mature outlook on the crypto market. We can also expect higher utility value as merchants find more accessible ways of accepting cryptocurrency, and the technology behind transactions also improves. While volatility may decrease, we can also expect a gradual but steady surge in the value of the cryptocurrency market as a whole. Just as the stock market has given way to long-term holders, so too will the cryptocurrency markets. At the very least, it appears to be something that is going to be here for the long run.
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Volatility is a natural part of market activity. We explore the volatility of crypto markets compared to that of traditional financial markets.
Volatility in financial markets refers to changes in the price of an asset. It can be healthy, with steady increases or decreases in price within a general range. It can also be extreme, with sudden price movements in either direction. Healthy volatility serves many purposes in a market, but it mainly creates opportunities for profit. For example, stock price changes enable traders to buy low and sell high, or “short” a stock they expect to decrease in price. Extreme volatility occurs when an asset’s price changes rapidly within a short time.
One of the largest reasons that cryptocurrencies like Bitcoin cannot achieve their goal of being a true hedge against the dollar and achieve currency status is due to their volatility. Since their inception, the cryptocurrency market has been incredibly volatile and irrational, as proven by Dogecoin’s rise to the top 3 and Elon Musk’s tweets causing pumps and dumps. This irrationality is mainly due to the nascency of cryptocurrencies and will be solved as the market matures and becomes more regulated.
One of the most important characteristics of a currency is its stability. If everyone woke up one day with significantly more or less purchasing power than they had the day before, it would be nearly impossible to fairly transact with others. Even though this lowering of purchasing power does happen with government-backed currencies such as the U.S. dollar, the rate of inflation is fairly predictable and low, so that a millionaire may only wake up with a dollar or so less purchasing power than the day before.
Bitcoin, whose goal is to be the world’s reserve currency, experiences extreme price volatility. A move of 5–10% in a day, which would be unheard of in the S&P 500 or NASDAQ, is commonplace in crypto and leads to massive gains and losses happening seemingly overnight. As a result, having all of one’s wealth in cryptocurrency proves to be risky, as the chance of waking up 10% more poor is a real concern. If a shop accepted Bitcoin, they would have to change their prices multiple times a day to remain competitive and keep making a profit.
Alongside this large volatility comes the sheer irrationality of the market. Currently, Dogecoin, one of the most irrational and economically unsound cryptocurrencies on the market, has a valuation of over $50 billion. Similarly, a tweet from Elon Musk on May 12 stating that Tesla would not be moving their Bitcoin until it became more environmentally friendly led to over $200 billion of value leaving the cryptocurrency space. This is over 10 times the amount of Bitcoin that Tesla holds, and billions more than Musk’s total net worth. Why does a market, which is supposed to be economically efficient and rational, act in such irrational ways?
One of the most obvious reasons is the speculation and nascency of the cryptocurrency market. Bitcoin has only been around for about 12 years, and only viewed as a serious asset for less than half of that time, so it would make sense that the asset is still in its price discovery phase. Unlike stocks, which have been around for hundreds of years and have concrete value based on them giving the holder rights to the future profits of a company, there is no such measure in Bitcoin. It’s more similar to gold, which has been used as a medium of exchange for almost the entirety of human history and still experiences price volatility and speculation. As time goes on and the cryptocurrency market matures, the price will begin to become more stable and universally agreed upon. This maturation will come as more people begin to hold cryptocurrency, use it as a medium of exchange, and generally understand its value.
Another driving factor in reducing the volatility of the market will be regulation by world governments. In the traditional stock market, people who hold lots of stock are usually subject to regulation about when they can sell and the public reporting of these sales. However, in the cryptocurrency market, anyone can sell at any time without any sort of legal repercussions, meaning that the whale who holds 28% of the Dogecoin supply could sell everything they own and crash the price without any consequences. Similarly, large companies or influential individuals have no rules about what they can or cannot say or do related to cryptocurrencies. For example, J.P. Morgan could buy lots of Bitcoin, announce Bitcoin-positive news, then dump the Bitcoin on unsuspecting investors. Studies have shown that similar price manipulation is what brought Bitcoin to its high of $20,000 in late 2017.
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Why is the Cryptocurrency Market so Volatile and Irrational, and When Will it Improve?
Bitpush News
May 15, 2021·5 min read
One of the largest reasons that cryptocurrencies like Bitcoin cannot achieve their goal of being a true hedge against the dollar and achieve currency status is due to their volatility. Since their inception, the cryptocurrency market has been incredibly volatile and irrational, as proven by Dogecoin’s rise to the top 3 and Elon Musk’s tweets causing pumps and dumps. This irrationality is mainly due to the nascency of cryptocurrencies and will be solved as the market matures and becomes more regulated.
One of the most important characteristics of a currency is its stability. If everyone woke up one day with significantly more or less purchasing power than they had the day before, it would be nearly impossible to fairly transact with others. Even though this lowering of purchasing power does happen with government-backed currencies such as the U.S. dollar, the rate of inflation is fairly predictable and low, so that a millionaire may only wake up with a dollar or so less purchasing power than the day before.
Bitcoin, whose goal is to be the world’s reserve currency, experiences extreme price volatility. A move of 5–10% in a day, which would be unheard of in the S&P 500 or NASDAQ, is commonplace in crypto and leads to massive gains and losses happening seemingly overnight. As a result, having all of one’s wealth in cryptocurrency proves to be risky, as the chance of waking up 10% more poor is a real concern. If a shop accepted Bitcoin, they would have to change their prices multiple times a day to remain competitive and keep making a profit.
Alongside this large volatility comes the sheer irrationality of the market. Currently, Dogecoin, one of the most irrational and economically unsound cryptocurrencies on the market, has a valuation of over $50 billion. Similarly, a tweet from Elon Musk on May 12 stating that Tesla would not be moving their Bitcoin until it became more environmentally friendly led to over $200 billion of value leaving the cryptocurrency space. This is over 10 times the amount of Bitcoin that Tesla holds, and billions more than Musk’s total net worth. Why does a market, which is supposed to be economically efficient and rational, act in such irrational ways?
One of the most obvious reasons is the speculation and nascency of the cryptocurrency market. Bitcoin has only been around for about 12 years, and only viewed as a serious asset for less than half of that time, so it would make sense that the asset is still in its price discovery phase. Unlike stocks, which have been around for hundreds of years and have concrete value based on them giving the holder rights to the future profits of a company, there is no such measure in Bitcoin. It’s more similar to gold, which has been used as a medium of exchange for almost the entirety of human history and still experiences price volatility and speculation. As time goes on and the cryptocurrency market matures, the price will begin to become more stable and universally agreed upon. This maturation will come as more people begin to hold cryptocurrency, use it as a medium of exchange, and generally understand its value.
Another driving factor in reducing the volatility of the market will be regulation by world governments. In the traditional stock market, people who hold lots of stock are usually subject to regulation about when they can sell and the public reporting of these sales. However, in the cryptocurrency market, anyone can sell at any time without any sort of legal repercussions, meaning that the whale who holds 28% of the Dogecoin supply could sell everything they own and crash the price without any consequences. Similarly, large companies or influential individuals have no rules about what they can or cannot say or do related to cryptocurrencies. For example, J.P. Morgan could buy lots of Bitcoin, announce Bitcoin-positive news, then dump the Bitcoin on unsuspecting investors. Studies have shown that similar price manipulation is what brought Bitcoin to its high of $20,000 in late 2017.
This manipulation is also evident in the price action after tweets by Elon Musk. He is one of the main reasons that Dogecoin has reached such a monumental valuation, as he frequently Tweets about the coin to his millions of followers. Unsuspecting retail investors, assuming that Musk knows what he is talking about and truly believes that DOGE will dethrone Bitcoin, buy the coin, leading to a massive pump. It is more likely that he is simply being ironic or satirical, and his followers are not picking up on it. Musk has gotten in trouble with the Securities and Exchange Commission for tweeting about Tesla’s stock before, but in the cryptocurrency world, this type of manipulation is completely legal, and causes irrational increases and decreases across the market.
