What is Volatility in Cryptocurrency?
Volatility is a measure of how much the price of an asset fluctuates over time. In the cryptocurrency markets, it refers to how much the price of a coin or token can change in a short period of time.
For example, a coin that fluctuates by 10 percent in a day is said to be more volatile than one that only fluctuates by 1 percent. While some investors see volatility as a risk, others view it as an opportunity to buy low and sell high.
Volatility in Trading Crypto Assets
In cryptocurrency, the price of assets fluctuates every second as it is an open market that runs 24/7. The relatively small global market capitalization and low regulation create such upheaval. It is no surprise that cryptocurrency is known as the riskiest and most volatile asset class in modern financial markets.
For seasoned traders, high volatility is part of the draw. There is potential for significant profits and losses depending on one’s timing of market movements.
Therefore, without volatility these margins would not be possible. It will interest you to know that most people love cryptocurrency because of its volatile nature. Let’s dig into this concept to get to understand how it shapes the asset.
While the volatility in crypto scare beginners, experienced hands are known to use it to their own advantage. They have used it to secure huge profits within a short period. Nonetheless, there have been predictions that such high volatility will reduce in the long run. The prediction relies on crypto prices stabilizing when regulation gets into the space, and huge capital comes in.
Why is volatility important to understand?
Volatility enables investors to measure the risk of investing in a valuable asset like Bitcoin. In a case whereby investors see how volatile an investment is, they tend to measure the risk by investing, even though they know they will lose part of their money in the short run. Some still go ahead to invest because they believe they will recover and make more profit in the long run.
A classic example is swing traders in crypto who enter the market at a particular time after measuring the risk. By measuring the risk, they consider such assets’ volatility. The value of the asset they have measured may go down after they have invested but are never worried because they know that the value will go up in days, weeks, or months.
Regardless, such practices seem like a gamble, and this is why crypto investors have been advised only to invest what they are always willing to lose. Additionally, they should diversify their portfolio. This way, they reduce the risk involved in investing. This means that if one investment goes down the drain, the other can always measure up.
Factors Driving Volatility
Certain factors can drive the volatility of cryptocurrency, mainly the media. Whatever news they publish, whether good, bad, genuine, or fake, has a huge influence on how the crypto market goes.
The bottom line for every crypto investor is to do proper research before investing and invest what you are willing to lose. Such research is necessary to avoid hemorrhaging in an unpredictable market.
