Volatility In Cryptocurrency- Is It A Good Thing?

As a result, the crypto-currencies’ credibility was questioned. One year later, much of that volatility has settled down with the crypto-market showing signs of maturity.

• Additionally, the crypto-currency underlying technology-the blockchain-has have largely been embraced as many appreciate innovation. Businesses and individuals have every reason to get interested in crypto-currencies and volatility. For instance, there is now more collaboration and interaction between the cryptocurrency industry and the public sector.

• Traditionally, volatility in finance cycles is defined as the statistical measure in the dispersion of an asset’s price. It is simply defined as the extent to which an asset’s price fluctuates with time. An investment is considered to be more volatile if its prices move up and down more aggressively like in the above case of cryptocurrency.

The following factors cause volatility for cryptocurrencies. Security breaches and high profile losses lead to volatility. The cryptocurrency market is relatively small compared to other markets and therefore any small force in the market would have a significant effect on price. Cryptocurrencies are purely digital and are not backed by any tangible/reserve assets like currency or commodity.

Any lack of faith in cryptocurrency will see a significant drop in prices. Additionally, the technology is still developing. Other factors include speculation, media influence, and the crypto investor profile.

Volatility is a critical concept to understand since it determines risk. Depending on where you stand, whether a trader or an investor, it is important to understand your risk tolerance and understand the cycles in the market. Let's start with risk tolerance. Different individuals would have different levels of risk tolerance. For instance, a 52 year old retiree would probably have a lower risk tolerance compared to a recent graduate since the retiree's main aim is to preserve wealth. Therefore, the 25-year-old is more likely to invest in cryptocurrencies than the retiree.

Statistics indicate that close to 60% of bitcoin buyers are individuals aged between 15-34 years. Additionally, the market is dominated by males who make up for 70% of investors and traders. As you think about your level of risk tolerance, it is important to note that high risk attracts potential high returns and the converse is potentially applicable. This is a principle in business called the Risk-return trade-off.

The truth is crypto-currencies are the riskiest asset that you could put your earnings into. But to those who invested in the early days when the currency was picking up and did proper timing to exit the market, they were able to reap up to 27,000%! For such a trader or investor, crypto-currencies were the best investment. But equally if one stayed on the market longer than when the currency had attained its peak to when the prices started going south, then definitely they incurred a loss.

• This underlines the importance of having your eyes wide open when investing in cryptocurrencies and be keen on timing; these will determine whether volatility is bad or good. With proper timing, volatility avails great returns to a trader and an investor but poor timing will lead to a bad experience.

It is also important to note that with very high volatility rates, cryptocurrencies fail to meet the requirements for being a ‘currency’

• Collaboration and interactions between the industry and the public sector

Recent surveys have shown that there have been high levels of collaboration and interaction by the industry and the public sector particularly with policymakers, regulators and legislators among others. There have been public consultations and public hearings between authorities and crypto-asset entities in Canada, the US, Malta and Bermuda among others.

• This engagement has helped reduce the knowledge gap in the industry and for the public which will contribute to clarity in future regulatory work. Studies have shown that large firms are 89% more likely to collaborate and interact compared to the 67% level of interaction and collaboration from small firms.

• A more involved regulatory framework

Due to the rise and plunge of the crypto assets, financial watchdogs have come in to investigate the crypto-asset industry to protect investors for loosing highly on their investments. Some jurisdictions have decided to wait and see, while others have taken a more proactive role and yet others have a non-supportive stance. The US house of representatives has already introduced two cryptocurrency bills on its floor: the U.S virtual currency market and regulatory competitiveness act of 2019, and the Virtual Currency Consumer Protection Act of 2019.

Arising regulations have had both positive and negative impacts on cryptocurrency markets. The first impact is that of traders/firms refusing to transact with customers from particular jurisdictions with harsh regulations. For instance, studies show that trading firms refused to serve up to 80% of payment only customers, 70% of exchange only customers and 82% of multi-segment service providers. Larger firms were more likely to overlook such regulations and serve compared to large firms.

• On the positive side, having a regulatory framework will open opportunities for cryptocurrency to enter the non-crypto market and thereby improve on liquidity which will also help reduce volatility. Majority of the new laws are geared at increasing protection, security and reducing fraud; elements which are of major concern for all stakeholders in the cryptocurrency world.

Greg Gilman, CEO of the Science Blockchain weighs in on this matter in the following words

“The SEC and other regulators are going to regulate as they deem appropriate, and have been actively trying to engage the crypto community in recent months to get more input. I think as more established funds and companies—like Science, A16z, and others—move into space, it helps to add a layer of perceived legitimacy, which may encourage regulators to act more quickly…I think the current uncertainty creates the risk of the United States becoming a jurisdiction of the second choice relative to other countries with defined, friendly policies. I think the SEC and other regulators are aware of this as well, and are trying to balance their missions of encouraging innovation and protecting consumers, and am confident that we’ll see meaningful, well thought out, and industry-friendly guidelines before too long,”

• Measuring volatility

Several indicators in the market could be used to measure the rate of volatility to make informed investment and trading decisions. A higher standard deviation indicates more volatility and that the prices are more spread out. The indicators give volatility estimates for a given projected number of days to allow for investment decisions.

There are a significant number of these volatility indicators which only measure Bitcoin’s volatility. This is because Bitcoin is a dominant cryptocurrency in the market. They include the following: BuybitcoinWorldwide, Bitcoin Volatility Index which measures bitcoin volatility, and Bitgur volatility Index which measures the top 10 largest cryptocurrencies based on market capitalization.

• Other measures taken by the industry includes the introduction of the Stablecoins (think JPM Coin) which are pegged to another stable asset such as the US dollar or gold to minimize volatility.

Volatility in its entirety is not bad; the inherent element of opportunity in volatility is a basis for gain in the cryptocurrency market. It is however important for risk averse individuals to cautiously consider adopting cryptocurrency.