Volatility in the crypto market
The degree of change is in the value of digital coins per unit time. The graph shows the price swings - ups and downs. Volatility is difference between the highest and lowest values in percent. It is calculated for a certain period - for the entire life of the cryptocurrency, for a year, for a month, for a week. This indicator is one of the main for forecasting and analytics of the cryptocurrency market. Volatility is usually estimated for a year or several months, for long-term forecasts. Volatility is taken for a short period, usually up to 1 month for short-term investments.
Predicted volatility is also used in trading - assumptions for further changes in the exchange rate. True, forecasting in this market is very approximate: even experienced market participants can’t always predict the real development of events.
Reasons for too much cryptocurrency volatility for short periods
We give an example: the minimum price of bitcoin in December 2017 was about $ 10thousand, the maximum - about $20 thousand. This means that the volatility of this cryptocurrency for December amounted to 100%. If we take into account the annual volatility - for bitcoin it will be more than 2000%. This isn’t a record: for some other cryptocurrencies for 2017, the volatility is even higher.
For comparison: the approximate annual volatility of fiat money (if the country's economy is in good condition) is about 3-4%, rarely more.
There are many reasons for such sharp jumps in the course. Among the main ones are:
— Absence of central regulation. Any fiat currency is regulated by the state, which may affect the exchange rate. Cryptocurrencies are not regulated by anyone or anything, so their course is subject to the influence of many factors.
— Absence of security of some real value. For example, the ruble exchange rate depends on the price and demand for oil. The higher the price of oil, and the greater the demand, the more stable the Russian currency will be, and vice versa. Cryptocurrencies — don’t depend on anything.
— Absence of real value. When a person buys a share of a company, he can evaluate its exact indicators: profitability, age, estimated value, and so on. Cryptocurrencies have only one more or less accurate indicator: market capitalization. However, it is also not something reinforced, but only depends on the interest of buyers.
Cryptocurrencies depend only on the market. If demand for a certain currency begins to rise, then the price will skyrocket. How much exactly depends on how much money you are willing to spend on it, and how many tokens can be issued (their number is very often limited).
Advantage and disadvantage of high volatility
High volatility for a trader or investor is both good and bad.
The main disadvantage is unpredictability. After all, the price can both soar and fall, and no one will say what exactly will happen. That is, if you invest $5000 in cryptocurrency, they will not necessarily turn into $50000 in 1-2 years. And vice versa can happen: interest in the chosen coin will disappear, and your investment will turn into 5 cents.
The cryptocurrency market is not predictable, and doesn’t cause mass interest in business. What is the point of using a cryptocurrency for transactions if it can lose tens of percent of the price the next day?
But there is a huge plus: a chance for a short period to get dozens or even hundreds or thousands of percent of profit. Conclusion: an investor can invest in some kind of «calm» project (for example, put it in a bank) and get a stable 5% per annum, or maybe invest in cryptocurrency, and get 500% per annum if you're lucky.