So, what is Volatility? It is nothing but the rate at which the price of a security either increases or decreases.
Volatility has been the case from the beginning of crypto. It has become common and to anyone new entering the market should expect some type of volatility. From the beginning till now the volatility hasn’t shown any sign of reducing.
The investors who thought they could control the cryptocurrency volatility have had a stressful days. As of yesterday, the prices of Bitcoin and Ethereum spiked up to 3% and 2% respectively and within an hour started dropping and even went to minus.
VOLATILITY IS IMPORTANT, BUT ALSO HARSH
A lot is spoken about volatility and its effect on cryptocurrency. At a particular time, volatility helped cryptocurrency reach the mainstream market.
To be more specific, Bitcoin when entered the mainstream market was called the “dark tool of the web” and was considered as a good investment. The leaders of banking and financial institution called it fad and rat poison and far to volatile to take seriously.
It was just the beginning and people had already started talking about the Bitcoin. Stories of Bitcoin billionaires and overnight millionaires popped up, and the individual investors flooded to be a part of the massive wave of Bitcoin mania.
This is why volatility was so important in establishing cryptocurrencies. Which became a potential asset that could also be adopted as a currency in mainstream society. However, this same volatility is also what could be harsh on that goal.
The main reason for people to be so uncomfortable with the volatility is because most of the people enter the market when the market is in the bullish phase or there is upward volatility. They have to digest the bearish phase and or when there is downward volatility.
WHY IS THE CRYPTOCURRENCY SO VOLATILE?
Here are few reasons that explain to us why is cryptocurrency market so volatile.
1. No intrinsic value
Cryptocurrencies don’t sell a product, earn or employ people despite of company-sized valuation. It doesn’t actually earn dividend like stocks and bonds. Whatever tiny amount of total value that comes in goes for the evolving of it. Due to which it is hard to value. How do we know if we have overbought or oversold? How do we know that good are of appropriate value or are overprices? Without any fundamental basis, we can depend only on the markets sentiments and often dictated by media who make money on viewership.
2. Lack of regulatory oversight
Cryptocurrency has made its presence known in the mainstream market. Due to which the government is clamping down on the industry, regulation is still in its early days. These limited regulations lead to manipulation of the market, which in return increases the volatility and discourages institutional investment. The investors take a step because of the insecurity of large funds and no protection towards bad actors.
3. The Morning Papers
For the past few years cryptocurrency has been in the spotlight and has given a lot of content to put forward in the news. As we said before, we depend on dictated media which can be newspaper for fundamental basis. The assets take a dip or a jump depending upon what kind off news has come out today. This leads to either upward or downward volatility.
HOW CAN YOU CONTROL THE VOLATILITY?
For institutional investors its not a big deal to handle the volatility in crypto market. Forex, stocks, assets are all prone to swings, but the problem is cryptocurrency volatility is off the chart.
We spoke about the investors who enter the market when its bullish phase and do not know how to react to the bearish phase.
As stock market has been established way before crypto market, it is a good place for these new investors to begin. Their tips will help to understand and handle the highs and lows in the market which will in return help in crypto market.
Roger Ma, founder at Lifelaidout, a certified financial planning company in New York, has suggested two strategies. The first one is Hold strategy, which says that there is no need to let the day-to-day changes affect you. rather, just hold on to the cryptocurrency to avoid volatility.
The second is the dollar cost averaging strategy, under which you buy investment on a fixed schedule. This investment strategy essentially stops you from making rash moves into, and out of, the marketplace.
There have always been highs and lows in the cryptocurrency market. The best we can do is follow these strategies, sit tight and enjoy the crypto rollercoaster ride. Certainly, with time there will be improvement in the market and the prices of cryptocurrency move towards upward volatility.