A common word used in the discourse of crypto is “volatility”. This is the concept in which crypto and the stock market are built. But one might ask: What does crypto market volatility mean? In this piece, we will be making sense of the volatility in crypto markets, volatility predictions, and ways to handle it.
What is market volatility?
Market volatility entails the rise and fall in the price movement of a security. Volatility in the crypto market illustrates how a coin can be at an all-time high at one point, and then dip tremendously the next. This is not new to the crypto market as volatility is one of the main principles that surrounds trading crypto.
Now you might wonder: What causes volatility in the crypto market? Well, the crypto market is highly fuelled by emotions. Why would you invest your money into something? The answer is that you probably see that investment grows and yields returns in the future. There you have it, your emotions have triggered you into investing a certain amount. Then, a lot of people probably share the same emotions as you and put their money into that same investment.
If the investment in question is Bitcoin, the value of Bitcoin will probably increase with more people buying it. In that case, the market cap of Bitcoin increases. Then suddenly, a public figure announces their displeasure with Bitcoin. What happens next? Investors will fear that the announcement will cause Bitcoin to reduce in value and will start pulling their money out. With more investors pulling money out, Bitcoin will continuously experience a dip. A dip is an event where the value of an asset continuously decreases.
This description goes to show how volatile the crypto market is. The market thrives on “speculation” in the short term but relies on future beliefs and technology in the long run. That is why a coin can be at its peak in one day, then experience a severe dip the next day.
How to predict market volatility?
With the nature of the crypto market, one might assume that predicting volatility will be impossible. After all, the market is driven by news and speculations. But with the right methods, volatility prediction is possible.
Here are the methods you can use to predict market volatility:
- Standard deviation: Standard deviation measures the range at which prices of an asset move from the average price point over a period of time. Even though the crypto market experiences high volatility, it still has its average value. This value is the yardstick used to measure how volatile the market is. The volatility is thereby measured by how far a current price point moves from the average price point. If it moves very far, then the market is highly volatile. On the other hand, if it experiences small movements, it has lower volatility.
Bollinger Bands indicator can be used to measure the standard deviations of securities. This indicator comprises lines that are meant to represent the “bands”. The wider the lines deviate from the average point the higher the volatility, and vice versa.
- Maximum drawdown: The maximum drawdown uses the previous losses of an asset to determine its chances of volatility.
One tool used in limiting maximum drawdown is the stop-loss order. The stop-loss order is a tool you can enforce to control the risks of an asset. This order is enforced when the value of an asset reaches a particular point. When it reaches that price, the asset is either bought or sold according to the will of the trader and to the direction of the position.
Why is crypto so volatile?
Recently, the world has experienced the turmoil of price movements in the history of crypto. Starting the year with crypto at a high, then its value dipping almost mid-year. One thing has been on everyone’s mind: Why is the crypto market so volatile?
The leading cause of the volatility of crypto in 2021 is the media. Let’s face it, it is no shocker that Elon Musk would have such an impact on the crypto market. After releasing his tweet that Tesla would no longer accept bitcoin, there was a continuous dip in its value.
The earliness of crypto also accounts for its volatility. Crypto has not fully gained ground yet unlike other forms of investment. This could lead to lots of fluctuations in price movements.
What is the most volatile crypto?
Bitcoin has shown a historical record of high volatility since its inception. The performance of Bitcoin in 2021 was quite astonishing with the sharp dips it experienced from April until mid summer.
Ethereum, on the other hand, had a round of highs in 2021. The price history of Ethereum in 2021 reveals a very progressive rise in price. With a price of about $730 in early January, it crossed $4,288 in early November.
Other examples of the most volatile crypto coins include Stellar, Ripple, and Bitcoin Cash, among others.
Why is Bitcoin so volatile?
Volatility in crypto is largely affected by speculations and the news. Likewise in Bitcoin, these factors greatly influence the highs and the lows. But aside from these forces, other factors can come into play to influence the market.
An interesting influence of Bitcoin is “Bitcoin whales.” A Bitcoin whale is an entity that buys and holds a large amount of Bitcoin. The amount of coins they hold is so much that it can influence Bitcoin prices. They are termed whales due to how large of a currency they hold in comparison to the “smaller fishes” in the crypto market.
How to use volatility and profit from it?
Volatility can actually be the hidden gem for traders. You can use it to your own advantage if you know how to transform it into a profitable strategy. As explained in another section of this article, volatility measures the deviation from the mean. So you can simply use this difference to find a good signal in your strategy. Also, there are lots of good strategies that work well in volatile markets; and that can easily be implemented in Vestinda.
Crypto Volatility Index
A volatility index, otherwise known as VIX, is used to show the likelihood of volatility in the market. The VIX represents price volatility in a period of about 30 days of the S&P 500 index (SPX). Crypto investors use this medium to determine the level of fear, anxiety, or emotions in the market. The VIX is so versatile that it can even be traded with different options.
As you invest in crypto, it is important you tread carefully. You should aim to use the crypto market volatility to your full advantage, and make returns from it. Ensure you are well informed on your trades and do not hesitate to use this article as your ultimate guide.