What is Volatility and Why Is It So High for Digital Coins?
The overwhelming majority of participants in the cryptocurrency market are painfully aware of such a concept as volatility. In this article, we will take a deeper look at this topic, try to understand what factors influence the degree of volatility, and also talk about whether it is dangerous for the digital assets industry and what we should expect in the future. So, let's talk about everything in order. Contents: (please, click the topic to scroll down to it)
- The concept of assets’ volatility
- What factors influence the degree of volatility?
- Is it possible to expect a decrease in volatility in the future?
1. The concept of assets’ volatility
First of all, let's briefly describe what volatility is in general. This term applies not only to the cryptocurrency market; it means the degree of fluctuation in the exchange rate of absolutely any asset (dollar, precious metals, minerals, stocks of individual companies, cryptocurrencies, etc.). It’s just that for certain assets, the degree of "spasmodic nature" of the rate is less, and for some is more. For example, if we take the most popular digital coin (btc) and its graph for the last month, we will see that the minimum rate was fixed on July 13, 2018 and it was $6145, according to the Coinmarketcap. While the maximum rate was on July 25, 2018, and it reached the mark of $8404. Thus, we can say that the positive volatility of Bitcoin in July 2018 is about 36%.
2. What factors influence the degree of volatility?
It is clear to all participants of the cryptocurrency community that the volatility of the digital coin market is quite high. The main reason for this is the man's greatest fear - uncertainty, investors simply cannot foresee what to expect from the industry in the future. Let's look at the most basic factors that directly affect the spasmodic nature of the courses.
- Lack of clear legislative base and support of world states
Such giants as the dollar, the pound sterling, the euro, etc. have a huge advantage in comparison with Bitcoin and other coins. This advantage lies in the support of the largest countries in the world. Cryptocurrencies are decentralized, for this reason they are practically impossible to control from a single center (the exception is the capture of 51% of the network capacity). Also, the lack of regulation and uniform world rules. In each state, digital coins are treated differently. This holds back institutional investors, who can significantly increase capitalization and thereby reduce market volatility.
- Lack of binding to a physical object that has a certain value
Cryptocurrencies are not tied to anything that can be touched, it causes a certain dissonance in the minds of many people, especially among representatives of the older generation. It is worth noting that there are also tokens of certain companies on the cryptocurrency market that are tied to various physical goods. But this phenomenon has no global character.
- Lack of real value calculation
Such a high level of cryptocurrencies’ volatility can also be explained by the lack of a real market value of such assets. For example, the estimated market value of securities of companies can be calculated by a specific formula (profit, growth, price of goods, etc.). The coins do not have this, they are only in the digital space and their courses fluctuate both for quite adequate, and for not entirely understandable reasons.
- Human psychology
Euphoria and panic are the two main causes of volatility, which are based purely on psychological factors. In the industry, there are a lot of newcomers (the so-called hamsters), who very often come in and out of the market at not the best time.
- Market manipulations
The capitalization of the entire digital coin market (as of July 30, 2018) is about $300 billion. If we talk about the capitalization of individual coins, then the figures are much more modest. At the moment, only 19 coins have a total value that exceeds $1 billion. This means that it is not difficult to artificially influence their value (for whales of the market).
3. Is it possible to expect a decrease in volatility in the future?
It is almost impossible to make precise forecasts on this issue. It should be noted that high volatility is absolutely normal for any new type of assets. If you remember that Bitcoin is only 10 years old, and the concept of a cryptocurrency market is slightly more than 5, it becomes obvious that increased volatility in the industry is not a reason for panic. Many analysts and top traders are confident that with time, when the technology of blockchain and digital coins can reveal their full potential, volatility will decrease.
The notion of volatility is not alien to any financial asset in the world. Cryptocurrencies are not yet a formed market, which has to go through many steps on its way to formation. Increased volatility has both disadvantages and advantages. It especially plays into the hands of traders who benefit from the course jumps. In the future, the situation may change, but it is definitely not worth expecting this in the next couple of years. Subscribe to The Coin Shark news in Facebook: https://www.facebook.com/coinshark/