Volatility in cryptocurrencies has been a key feature that has differentiated this market from traditional finance. That is why you must understand it in depth to take advantage of this quality of the crypto world.
In traditional finance, volatility is defined as the statistical measure of the dispersion of the price of an asset. Simply, volatility describes the degree to which the price of an asset fluctuates over time.
An investment is considered unstable if its prices move aggressively up or down daily, as can be seen in the cryptocurrency market. Here is an example of volatility: low volatility assets such as gold or government bonds are extremely stable, with prices fluctuating steadily and not changing with frequency. High volatility assets, on the other hand, move up and down in value quickly and aggressively as are the crypts.
Volatility is a vital concept to understand since it measures risks. For investors and traders, understanding their risk tolerance is always the first step before initiating any form of investment. Different individuals have a different level of risk tolerance, and this affects the choice of investments.
It should be mentioned that the level of risks that one chooses to carry out is highly correlated with the potential benefits that it would acquire. In other words, a higher investment risk is associated with a higher probability of generating better returns, while a low risk investment would produce a lower rate of returns. This is known as risk-return.
Managing volatility is nothing new for institutionalized investors. Assets, stocks, bonds and even forex are prone to changes, but the problem is that cryptocurrency volatility is out of the picture.
The big stock market crash in 2018. It is a difficult lesson for many in the crypto market at the extreme volatility of these digital assets at their best.
In a span of 2 years, the price of crypto has fluctuated vigorously from end to end, and many are considered a highly unstable market full of speculation and uncertainty. The first and largest cryptocurrency based on market capitalization, Bitcoin, experienced tremendous growth in 2017, from $ 700 to almost $ 20,000. That is an incredible 27,000% yield rate of only 12 months.
Part of what has consolidated cryptocurrencies on the map since they exploded in the traditional investor market has been their volatility. Cryptocurrency investors are often new to the game and have not experienced the range of previous changes: watch their money grow and reduce it substantially by the hour.
Those who participate in the cryptocurrency market are considered to be risk takers. In fact, about 60% of Bitcoin buyers are aged between 15-34 years old. It is also interesting to note that men dominate the cryptocurrency market significantly by more than 70%. These statistics show that millennial youth generation are more attracted to high risk investments, compared to their older counterparts.
However, such volatility is a double-edged sword, and the cryptocurrency market has shown that in 2018 the price of Bitcoin would lose more than 50 percent sometimes from its final year price of $ 13,000.
A more volatile market generates large price movements, which in turn can provide greater opportunities to earn a tremendous rate of return on investments. Lower volatility equals lower price movements and therefore a lower probability of earning the desired returns.
The ability to make potentially significant amounts of money is perhaps the greatest attraction for many to invest in cryptocurrencies. The enormous market volatility allows the potential for higher returns, presenting a great opportunity for traders and investors to exploit market volatility to earn money in any market direction.
To this, add a very short time frame compared to traditional markets. The possibility of playing not only in short and long, but in very small investment horizons and obtaining high profits due to the volatility of cryptocurrencies, is a key factor that has boosted its popularity and therefore the entry into scene of the new crypto-billionaires.
There is evidence today that suggests that Bitcoin volatility is declining, that abrupt changes are not so wild and that, in fact, they become more manageable over time. This has a lot to do with the increase in the adoption and distribution of Bitcoin in a wide and varied market.
In all investments we must be aware of our own risk appetite to assess whether it is prepared for the worrying level of risks that the market has to offer.