VOLATILITY OF CRYPTOCURRENCY

JUST LIKE LIFE, CRYPTO HAS UPS & DOWNS

Authored By

Abhivyakti Mishra, Researcher

Bitcoin was worth around $20,000 (around Rs. 14.85 lakh) in December 2020. It surpassed $40,000 (approximately Rs. 29.70 lakh) in January of this year. It hit an all-time high of $65,000 (approximately Rs 48.27 lakh) in April, continuing its bull run.

Then it plummeted in May, and for the whole of June, it remained below $30,000 (approximately Rs 22.28 lakh). Around July 20, the currency began to surge again, and for the first time in almost three months, it reached $45,000 (approximately Rs 33.42 lakh) last week. Most other major bitcoin coins have reacted similarly in recent months.

Cryptocurrency is derided around the world for its "outrageous" volatility, which often scares newcomers away before they can sample the delights of the cryptocurrency markets. People are more frightened by large red spikes on the charts with a double-digit negative % change in the prices than by similar positive percentage changes, and here is where negative bias comes into play.

Volatility plays a crucial role in any trading market, and in order to comprehend this, we must first comprehend what volatility is. Volatility is defined in conventional finance as the degree to which the price of an asset fluctuates over time. It is defined as the price dispersion of an asset from its initial price in a 24-hour trade.

Bonds and gold are fairly stable investments with just minor fluctuations. This provides traders with a compelling reason to refrain from referring to Bitcoin as "Digital Gold," at least until its volatility is lessened. High volatility investments include stocks and derivatives, and trillions of dollars have been invested in this area. This supports the theory that it is the fear of a large loss rather than the volatility that has kept traders away from cryptocurrency markets. Volatility is inextricably related to the risks and rewards that come with it.

Understanding one's risk tolerance is always the first step for investors and traders before investing in any type of investment. Varied people have different levels of risk tolerance, which influences their investment choices. Varied people have different levels of risk tolerance, which influences their investment choices. A 25-year-old growth-oriented investor will naturally take bigger risks than a 60-year-old retired investor who is just interested in maintaining his capital. Risk is directly proportional to returns, and this is where the relevance of volatility can be gauged.

An article by NDTV lists the following reasons for the volatility of cryptocurrency:

Markets in Transition

Cryptocurrency is still a new sector that is gaining a lot of traction while also causing a lot of dissatisfaction among investors. Despite the widespread coverage, this market is still insignificant when compared to regular currencies or even gold. This means that even minor causes, such as a group of people holding huge quantities of crypto coins, can have an impact on the market.

Speculation

Speculation is the lifeblood of the bitcoin market. To profit, investors bet on whether prices would rise or fall. These speculative bets result in a large inflow of cash or a large outflow of cash, resulting in significant volatility. The majority of cryptocurrencies, such as Bitcoin and Ether, are solely digital assets with no tangible commodity or financial basis. That is to say, their price is solely controlled by supply and demand. In the absence of any other stabilising force, such as government support, a fluctuation in demand or supply might occur for a variety of reasons.

Technology Advancement

The blockchain or other alternative technology that these coins rely on is still in the early stages of development. It's been less than a decade since the Bitcoin concept was initially introduced. When a smart contract is not validated within the timescale expected, there is a scalability problem, which causes sudden downward pressure.

Investors on the Brink

This market, unlike real estate or the stock market, is not thought to require knowledge. As a result, it is largely part-timers who invest in it. They arrive with the expectation of immediate gains, but when that does not happen, they lose patience and go. Volatility is also a result of this frequent involvement and withdrawal.

Investors on the Brink

This market, unlike real estate or the stock market, is not thought to require knowledge. As a result, it is largely part-timers who invest in it. They arrive with the expectation of immediate gains, but when that does not happen, they lose patience and go. Volatility is also a result of this frequent involvement and withdrawal. CNBC says Bitcoin’s value is also derived from its decentralized network. There is no central authority that has the power to intervene in the bitcoin market that is also a major reason for its volatility.




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