What is volatility?

01 Dec, 2019 Colin Baseman

What is volatility?

It came to the field of cryptocurrencies from the traditional stock market and is not something fundamentally new. Volatility refers to the statistics of fluctuations in the price of a certain asset: the dollar, the euro, and others.

A volatile currency is one that is capable of significant price jumps in a short time - this we can see in the situation with bitcoin when its value changes in a few days by hundreds or thousands of dollars. 

Thus, we understand that currencies with high volatility are characterized by rapid changes in price, both in the larger and in the smaller side. This is what attracts a lot of people who want to make quick money on cryptocurrency: the risk and opportunity to catch such a jump and immediately get a profit of tens of percent.

 The reasons for the volatility of the cryptocurrency

The first and main reason is the lack of regulation by the state. We have already told you that cryptocurrencies are decentralized, and the function of regulation is performed by the market itself.

It is also worth taking into account the fact that the cryptocurrency market is extremely young. When it first appeared, it made a revolution similar to the Internet. Many patterns of traditional markets have not yet migrated here, which makes trading less predictable.

The market volume is now very small, which makes any movement of major players very significant. Capitalization of $ 260 billion leaves financial giants a lot of room for manipulation due to the size of their positions.

In addition, it should be remembered that cryptocurrencies do not have any material value and are not backed by precious metals or the authority of the state in contrast to traditional world currencies. The price of cryptocurrency is extremely unstable and therefore you can be sure that it will continue to trend to jumps.

The pros and cons of the volatility of the cryptocurrency

Most likely, you know that in a traditional economy, currency volatility is a negative phenomenon. How does it affect cryptocurrencies? Let's figure it out.

The obvious and main advantage is the ability to earn on cryptocurrency. Unfortunately, of the significant advantages, this is the only thing that can be emphasized.

But there are quite a lot of downsides:

  • Cryptocurrency will be quite problematic to “migrate” to the real world. While its value jumps by tens and hundreds of dollars every day, most entrepreneurs and sellers are unlikely to want to contact it.
  • It is quite difficult to predict anything about cryptocurrencies. Today, bitcoin costs $ 10,000, and a week later - $ 7000 and vice versa, there were already many such examples.
  • While cryptocurrency is so volatile, it is difficult to become a means of accumulation. In all other respects, it is perfect for this purpose. But investors are still investing in it with great caution.

Can the volatility of cryptocurrencies decrease?

Of course, this is possible, but what reasons can serve a more solid value of digital coins? 

First, this can be facilitated by the approximation of cryptocurrencies to the traditional economy. But if this happens, they will lose decentralization - one of the main advantages. But so far there are no prerequisites to talk about such a trend, and such a scenario is unlikely.

The second scenario in which this can happen is to determine the real value of cryptocurrencies. For this to happen, digital assets must be backed up by something like gold. In this case, their cost and popularity can change greatly.

And the third option is simply market growth and infrastructure development. If the crypto market is equal in volume to the financial one, it will become much more difficult to manipulate or even just shake it.

Once you know what volatility is, you will have a much clearer idea of how the cryptocurrency market works. Of course, everyone will make some conclusions and will be right in their own way, but we advise you not to forget that cryptocurrencies are quite unstable, and make investment decisions based on this.