Most Volatile Cryptocurrencies
What Is Volatility?
Cryptocurrency differs from stocks, gold and even fiat money by sharp fluctuations in the exchange rate. Moreover, the cost varies in a very wide range. And sometimes jumps occur within one trading session. The main thing that unites all cryptocurrencies is the frequent fluctuation of their rate.
In the traditional stock market, volatility is defined as a statistical measure of fluctuations in the price of an asset. In other words, volatility is characterized by the degree of change in the price of an asset over time. Investments are considered volatile if their value makes significant jumps, similar to what we see in the crypto market.
Assets such as gold or government bonds are extremely stable and their prices experience little change. At the same time, highly volatile crypto coins rise and fall in value quickly and aggressively.
Why is the volatility of cryptocurrencies significantly higher than the volatility of traditional financial assets? The question is what is the basis for this or that asset. Any cryptocurrency is just an encrypted record, a number.
What about securities? This is a document confirming the owner's right to something. If we are talking about a bond, then the investor is required to pay a predetermined amount, and even transfer interest on the coupon with a certain frequency. Otherwise bankruptcy is inevitable.
The situation with the base price of a share is somewhat more complicated. It can be calculated in several ways. If dividends are paid on shares, then their size can be compared with a bond of the same income size or with a bank deposit, adjust for risk and get a fair quote. A share is an equity in a company. It means that you can formally buy a controlling stake in the enterprise, liquidate it and sell off the property.
At the same time, the share of money attributable to it as a result of such a sale can be taken as the fair price of the share. The company generates income, makes a profit. Future receipts of money always have today's value, which is calculated mathematically in terms of corporate finance. The valuation in today's money of future receipts is also the fair value of the share.
Whichever way an investor chooses to value a stock, one thing is clear: every security has some kind of fair fundamental value, depending on the underlying assets, future earnings, performance, and so on. And the expectations of buyers, a certain warming up or, conversely, cooling of the market, are rather of a secondary nature, although they have a significant impact. Volatility can be quite high, but not unlimited, if only because quotes do not change in a vacuum, but around a fair price.
Skillful traders analyze the index of virtual coin market volatility on monthly charts. The functioning of digital money depends on various factors, and it is more difficult to predict their movement. It is recommended to make forecasts and develop strategies based on the results obtained, using parameters that are calculated for at least the last quarter. A number of traders sometimes pay attention to the historical volatility of digital coins, or the rate of price change over the entire period. During this period, the digital coin is traded on the market.
When developing trading strategies, traders take into account the expected volatility, or forecasts of the price behavior of a particular crypto coin. The following parameters help to
calculate this indicator:
- the current price of the coin;
- indicator of historical volatility;
- market sentiment;
- liquidity of the coin;
- capitalization and the nature of the change in the popularity of the project, it is based on the selected coin;
- news reports that directly affect the movement of the coin rate.
The volatility indicator determines the value of an asset: for some traders, sharp fluctuations in the exchange rate may seem attractive for investment, while others prefer more “calm” coins and tokens. It depends on the approach that the market participant uses. Traders who prefer long-term investment strategies usually avoid highly volatile assets, as sharp price fluctuations raise doubts about the correctness of the choice made.
With short-term investments, such crypto coins are more popular, as they allow you to earn money in a relatively short period of time. But in such cases, traders are forced to constantly monitor the change in the price chart and sell or buy coins in a timely manner. On the other hand, with short-term investment, any change in the direction of the course can bring income.
Сryptocurrency Volatility Features
It cannot be said that cryptocurrencies are worth absolutely nothing, that this is generally only a conditional figure. In fact, Bitcoin quotes depend on two factors: on the demand for this tool to serve the turnover as an electronic currency – for the regular and for the "black" market. And also on the expectations and faith of investors and speculators.
In today's world, the demand for cryptocurrencies as a means of payment exists, but not so great. But the most interesting thing is that it is precisely the speculative hype that even interferes with the use of cryptocurrencies for their intended purpose. Because it leads to exchange rate instability. As a result, not all sellers are ready to give up their goods for something that is not known how much it will cost tomorrow.
Both short-term and long-term volatility can be measured. The term "short-term volatility" describes fluctuations that occur over days or weeks and are usually more frequent. On the other hand, "long-term volatility" is less common, but can last for months or even years. If you are investing in cryptocurrencies, it is very important to understand both types of volatility.
Understanding the definition of volatility is vital because it reflects the risks that financial investments in an asset carry. Weighing risks by investors and traders is always the first step before implementing a trading strategy. People have different levels of risk tolerance and this influences their choice of investment class.
It should be noted that risks are closely related to potential profit. In other words, risky assets offer a greater chance of earning large returns, while low-risk investments offer a lower rate of return.
Cryptocurrencies are the most risky asset, investing in which you can get rich, or, conversely, lose everything. We already know the consequences of the market crisis in 2018, when most volatile cryptocurrency assets’ prices fell by about 90%.
As mentioned above, crypto coins are highly volatile. It is better to consider the calculation of the level using a specific example: according to the results of one month, the minimum cost of a virtual coin is $100, and the maximum is $200. Thus, the level of volatility will be 50%.
Calculations of the volatility of cryptocoins are usually carried out for a more or less long period, for example, a month. This is due to the fact that the quotes of digital coins can change greatly during the day or week.
Some features of the volatility of digital currencies:
- The most volatile cryptocurrencies are less popular coins. Often, unknown digital currencies, for reasons that are not entirely clear, grew tenfold in price in a short amount of time, after which they also quickly depreciated;
- Bitcoin is the least volatile crypto coin. Due to high trading volumes and high liquidity, it is much more difficult to influence the value of Bitcoin than the price of altcoins;
- In the future, the volatility of the price of cryptocurrencies may reach the volatility of fiat funds.
What Is the Reason for the Volatility of Cryptocurrencies?
The most important reason for the volatility of the market is that no one can predict exactly what to expect from crypto coins in the future. A small correction can trigger a significant decline in the rate, as many panicked traders start selling their assets. This also works in the opposite direction: when positive news or even rumors appear, the rate may rise slightly.
Other reasons include the following:
Lack of Reference to Physical Value
The exchange rate of many currencies depends on the minerals mined in the country, since they make up a significant part of exports. The fact that virtual coins are not tied to tangible values causes dissonance. Some coins are still linked to values (for example, the Tether currency, which is pegged to the US dollar);
The rapid increase in the price of currencies attracts novice traders who constantly make mistakes, thereby unpredictably affecting changes in the exchange rate.
Market Manipulations with Cryptocurrencies
Holders of less popular crypto coins can easily cause a collapse in value by putting up for sale most of them.
The young market will be much more volatile than the mature and time-tested traditional market. Just as the internet revolutionized in the 1990s and internet companies began to generate significant revenues, now the cryptocurrency market has taken a similar position.
Lack of Regulation
This market is largely unregulated due to a lack of understanding of the fundamentals of the blockchain technology on which cryptocurrency projects are built. Due to the lack of regulations, there is an influx of unscrupulous participants who manipulate the market at their own discretion. They successfully implement collective pump and dump schemes and manipulate trading volumes on the sites. As a result, panic is sown in the ecosystem, which leads to even more chaos and volatility of cryptocurrencies.
However, in 2022, the degree of regulation of cryptocurrencies, at least in Western countries, continued to grow, which, accordingly, affected the volatility of cryptocurrencies. But today, new coins are the most volatile, while such old-timers of the market as Bitcoin and Ethereum are more stable.
Law of Supply and Demand
The law of supply and demand is one of the main factors influencing the rate of cryptocurrencies. If demand is relatively low and supply is high, then the value of the asset declines. At the same time, unlike fiat (traditional) currencies, the supply of cryptocurrency is always limited. Therefore, the demand for it will not decrease. However, interest in different cryptocurrencies can vary significantly.
Rules and Regulations
Another important factor that correlates quite closely with the price of cryptocurrencies is the various types of regulations or requirements imposed by national authorities. In the event of their tightening, as well as possible repression, the price of the cryptocurrency may fall. On the other hand, with the adoption of friendly measures towards the cryptocurrency industry, these assets will show strong growth.
The activities of the media, which largely determine the mood of investors, can also have an impact on the cryptocurrency rate. How and what they write about cryptocurrencies is largely reflected in the demand: good news can increase it, while bad news brings panic to the market. This leads to a rapid flight of investors and sudden drops in the crypto market. At the same time, the media also play an important role in educating the public about the operation of the cryptocurrency market, which leads to greater understanding on the part of the population and the desire to own virtual currencies.
A market with a high volume of transactions and a large number of active participants (buyers and sellers) is known as a highly liquid market. Unfortunately, the cryptocurrency market cannot boast of high liquidity at the moment, since the daily trading volume is nothing compared to the value of other traditional investments traded on the stock market.
A low-liquidity market like the cryptocurrency market is subject to sharp and aggressive price swings, and one large order can move the markets and instantly cause the price to rise or fall sharply.
Digital Currency Mining Cost
Cryptocurrencies like Bitcoin don't just appear out of nowhere. Users mine them with the help of special equipment – high-performance computers. Over time, this process becomes more and more complex. Thus, if mining costs grow, this cannot but affect the price of crypto assets.
Perhaps there are several other factors that can also affect the price of cryptocurrencies, for example, manipulation provoked by large players. However, the most significant are those mentioned above.
Is Cryptocurrency Volatility Beneficial or Harmful?
Cryptocurrency differs from stocks, gold and even fiat money, by sharp fluctuations in the exchange rate. Moreover, the cost varies in a very wide range. And sometimes jumps occur within one trading session.
At first glance, volatility is a minus for cryptocurrencies. Indeed, due to sharp jumps, it is impossible to calmly invest in crypto and store capital in it. But is it really so? Perhaps exchange rate fluctuations can be used to advantage? Let us consider the advantages and disadvantages of this phenomenon.
Crypto Volatility Benefits
A quick and strong change in the cryptocurrency exchange rate has the following advantages:
Opportunity to get high income in minimum time
The stronger and faster the exchange rate changes, the more profit an investor or trader can receive. To do this, you only need to "catch" the change. Technical analysis tools, as well as specialized bots, help predict the movement.
Fluctuations in the rate and earnings of investors increase people's interest in crypto. That is, more and more people are starting to invest in coins. Thus, the asset becomes more liquid.
Growth in trading volumes
As investment amounts increase, the volume of transactions carried out on the exchanges also increases. This, in turn, stimulates the development of the cryptocurrency industry. Developers see user interest in projects and release new blockchains or tokens on existing platforms.
Increasing popularity of crypto assets
High earnings due to volatility, increased liquidity and trading volumes turn this financial instrument from new and exotic into quite popular. That is, all participants in the process will benefit from this.
Crypto Volatility Disadvantages
The volatility of cryptocurrencies has certain disadvantages.
Cryptocurrencies have limited use in the real economy. Today it is hard to find a place where you can buy goods and pay with Bitcoin. Stores set prices in national currency or its value against the dollar.
Cryptocurrencies do not yet participate in international trade. Therefore, they are not of interest to large producers in the real sector of the economy.
The high volatility of cryptocurrencies only benefits investors and traders. Experienced players can make more profits from cryptocurrency trading compared to other assets. Playing for an increase or decrease in the rate is the most popular way to earn money. High volatility contributes to an increase in trading volumes.
Risk of losing funds
If you make mistakes in investing or opening a trading position “in the wrong direction”, there is a high risk of losing your investment capital. In order to prevent such a situation, investments should be diversified by types of assets or by types of one asset.
Cannot be used as a means of payment
Due to the rapid fluctuations in the exchange rate, it is difficult to use cryptocurrencies as a means of paying for goods and services. While the settlement is taking place, there is a risk of losses due to the depreciation. But stablecoins are more suitable for this purpose. Each issued token is backed by tangible assets.
Low demand among large investors
For institutional investors, it is not high profitability that is important, but stability. But the crypto cannot boast of this. However, now derivative financial instruments have appeared, the course of which has been smoothed. Therefore, large investors are beginning to come into this area.
The high volatility of cryptocurrencies leads to the fact that under the influence of even the most insignificant factors, their quotes can change rapidly. In such a situation, it is simply impossible to make a forecast of changes in quotations, which will have acceptable accuracy. High volatility complicates the technical analysis of charts, as well as the prediction of the course movement. However, with a correct forecast, the amount of a trader's earnings increases significantly.
Impossible to use in business
Since the value of tokens is constantly changing, certain modern companies refuse to use them as a means of payment.
Public Perception of Cryptocurrencies with High Volatility
This is another difference between regular fiat money and cryptocurrencies. Society perceives ordinary currency as a means of payment and trusts it.
The central bank is responsible for the emission, it also maintains the proper level of liquidity and ensures that the exchange rate is relatively stable. People are used to the fact that someone monitors and controls the circulation of funds, even if this is fundamentally wrong.
Fiat money is accepted everywhere. If we are talking about US dollars or euros, they can be exchanged in any country and already purchase goods and services for the local currency. Classical money can be cashed out at any time using banks or ATMs and, thus, pay even where there are no payment terminals in stores.
As for cryptocurrencies and Bitcoin, there is no such trust in them yet. They cannot be cashed out just as easily, and not all stores accept such coins. Although ATMs have already been installed in many progressive countries, some chains of restaurants and shops accept crypto assets. But in comparison with the global circulation of fiat funds, these are still negligible achievements.
Moreover, society still treats cryptocurrency with a certain amount of wariness.
Some even believe that Bitcoin is just another pyramid scheme. In addition, for the majority, the principle of the emergence of new units of cryptocurrency is not clear.
If everything is more or less clear with fiat money – the decision to issue them is made by the central bank, then the decentralization inherent in Bitcoin and altcoins somewhat scares the average person.
Finally, today one can quite often hear the opinions of truly iconic figures in the world of economics and finance, who predict a not very bright future for cryptocurrencies. It also deters potential investors.
A wary attitude towards Bitcoin and other cryptocurrencies significantly affects the liquidity of this industry. So far, it cannot boast of the same indicators as Forex or stock exchanges. Accordingly, in the near future, the volatility of cryptocurrencies will remain quite high.
What Effect Does Crypto Volatility Have on Trading?
Firstly, when choosing Bitcoin or another digital unit as a working asset, you can refuse to use leverage and use only your own money for trading. Changes in the exchange rate are quite enough to make money even using only your own money when opening positions.
Also, the high volatility of popular cryptocurrencies makes it possible to pay much less attention to the spread sizes for these currency pairs. After all, the trend in the right direction quite quickly compensates for the commission paid to the broker.
Among the shortcomings, it can be noted that if you have chosen virtual money as a working asset, then you will not be able to trade comfortably. You need to learn how to make decisions quickly, do not forget to put stop orders and not leave open positions unattended for a long time. That is why cryptocurrency trading is the best suited for intraday strategies and requires careful use in long-term trading.
Each person perceives the volatility of cryptocurrencies in their own way. It all depends on the appetite for risk. Risk averse individuals avoid high volatility investments because they are more concerned about the stability and safety of their wealth. Those people who participate in crypto trading are usually called risky.
According to the US Blockchain Capital Harris Poll, about 60% of Bitcoin buyers are millennials. These statistics prove that young people are more interested in risky investments. And since the cryptocurrency market is a highly volatile market, it is a double-edged sword: it has the potential to generate tidy profits, but each participant also faces a high risk of losing a significant share of capital.
Ultimately, every investor needs to know their own measure of risk appetite in order to sensibly assess their options. Volatility is two sides of the same coin. When used correctly, it is profitable. It depends only on the investor whether he will receive income from volatility or lose the invested funds.