There are many reasons why crypto is more volatile than other asset classes. In this guide we’ll have the cryptocurrency market volatility explained.
According to OracleDispatch crypto markets are often referred to as being highly volatile. But what exactly does this mean? And why is it the case? In this article, we’ll take a look at implied volatility in financial markets and how it affects the prices of assets. We’ll also see how cryptocurrencies compare to other asset classes when it comes to volatility.
Historical Volatility Of Cryptocurrency
What goes up must come down – or so the saying goes. And in the world of cryptocurrency, this is often very true. The prices of digital assets are often highly volatile, and crashes are not uncommon. Here are some of the major crashes that have occurred in the crypto market over the past few years.
– Mt. Gox crash: In 2014, the world’s largest bitcoin exchange at the time, Mt. Gox, filed for bankruptcy after losing 850,000 bitcoins (worth $473 million at the time) to hackers. This was a major blow to the credibility of cryptocurrencies and resulted in a price crash of around 50% across all markets. It was also a clear signal of bitcoin’s volatility.
– Ethereum flash crash: In June 2017, the price of ethereum fell from around $319 to 10 cents in a matter of seconds on the GDAX exchange. This was caused by a “multimillion dollar market sell” that was placed on the order book.
– Bitcoin cash hard fork: In November 2018, bitcoin cash (BCH) underwent a hard fork which resulted in two new tokens – BCHABC and BCHSV. The price of BCH crashed by over 50% as a result of the fork.
– Crypto market crash: In January 2018, the bitcoin market and other major cryptos experienced a major crash, with prices falling by over 50% across the board. This was largely due to concerns over regulation and government crackdowns on cryptocurrencies.
What Is Volatility?
In financial markets, volatility is a measure of how much the price of an asset fluctuates over time. It can be measured by using standard deviation, which is a statistical tool that measures the dispersion of data points around the mean.
When it comes to cryptocurrency prices, crypto volatility can be caused by a number of factors. These include news events, changes in regulation, and even technical aspects such as forks and hard forks.
What Is Implied Volatility?
Implied volatility is a measure of how much the market expects an asset to fluctuate in the future. It is derived from the prices of options contracts, which are financial instruments that give the holder the right, but not the obligation, to buy or sell an asset at a certain price on or before a certain date.
The implied volatility of an asset is calculated by using a pricing model, such as the Black-Scholes model. This takes into account a number of factors, such as the price of the underlying asset, the strike price of the option, the time to expiration, the interest rate, and the dividend yield.
What Causes Volatility in Cryptocurrency Prices?
There are a number of factors that can cause volatility in cryptocurrency prices. These include:
– News events: Positive or negative news about cryptocurrencies can have a big impact on prices. For example, rumors that China was going to ban bitcoin caused a major sell-off in 2013 and 2014.
– Changes in regulation: Uncertainty about how cryptocurrencies will be regulated can also cause volatility. For example, when China announced a crackdown on ICOs in September 2017, the price of bitcoin fell by over 10%.
– Technical aspects: Hard forks and soft forks can also lead to volatility. For example, when the bitcoin network hard forked to create bitcoin cash in August 2017, the price of bitcoin fell by around $1,000.
How Do Cryptocurrencies Compare to Other Asset Classes?
When it comes to implied volatility, cryptocurrencies are actually fairly similar to other asset classes such as stocks, commodities, and even fiat currencies. However, they do tend to be more volatile than traditional assets such as government bonds.
The table below shows the implied volatility of various asset classes. As you can see, cryptocurrencies have an implied volatility of around 50%, which is similar to stocks and commodities. However, their volatility is higher than that of fiat currencies and government bonds.
Asset class |
Implied volatility |
| Cryptocurrencies | 50% |
| Stocks | 30% |
| Commodities | 40% |
| Fiat currencies | 10% |
| Government bonds | 5% |
Why are cryptocurrencies more volatile than other asset classes?
Cryptocurrencies are often more volatile than other asset classes due to a number of factors.
First, they’re still a relatively new asset class and thus there’s less liquidity in the market. This means that prices can move sharply on small amounts of trading activity.
Second, cryptocurrencies are not backed by any government or central bank, which adds to their volatility.
Finally, investors in cryptocurrencies are often speculators who are quick to buy or sell when prices move up or down. This can amplify price movements.
Cryptocurrency Is Not Intrinsically Valuable
One of the main reasons why cryptocurrency prices are so volatile is because they’re not backed by anything of intrinsic value. Fiat currencies, on the other hand, are backed by the full faith and credit of the issuing government. This means that if a country’s currency becomes worthless, the government can still repay its debts with other assets, such as gold or silver.
Cryptocurrencies, on the other hand, are not backed by anything. They’re just digital tokens that rely on encryption to secure their transactions. This means that if people lose faith in cryptocurrencies, their price can crash very quickly.
The Lack of Regulation Adds to Volatility
Another factor that contributes to cryptocurrency volatility is the lack of regulation. Cryptocurrencies are not subject to the same rules and regulations as other asset classes, such as stocks and bonds. This lack of regulation makes it difficult for investors to know what to expect in terms of price movements.
In addition, the lack of regulation means that there’s no central authority to stabilize prices if they start to fall. This can cause a downward spiral in prices, as we saw during the bitcoin crash in 2014.
Cryptocurrency Is A Purely Digital Asset
Another factor that contributes to cryptocurrency volatility is the fact that it’s a purely digital asset. Unlike stocks or bonds, which are physical assets, cryptocurrencies only exist on the internet.
This makes them more susceptible to hacking and fraud. For example, in 2014, Mt. Gox, once the largest bitcoin exchange, filed for bankruptcy after losing 850,000 bitcoins to hackers. This loss of confidence caused the price of bitcoin to crash by 60%.
Fragile Investors In The Crypto Space
Another factor that contributes to cryptocurrency volatility is the fact that many investors in the space are speculators. These investors are quick to buy or sell cryptocurrencies when prices move up or down, which can amplify price movements.
In addition, many of these investors are inexperienced and don’t understand the risks involved in investing in cryptocurrencies. This lack of understanding can lead to bad investment decisions, which can drive prices down.
Crypto Is An Evolving Technology
Finally, it’s important to remember that cryptocurrencies are still a new and evolving technology. This means that there are constantly new developments that can impact prices.
For example, in 2017, the price of bitcoin surged when it became apparent that the cryptocurrency was gaining mainstream adoption. However, prices fell sharply after China cracked down on cryptocurrency exchanges and ICOs.
Similarly, in 2018, we saw a sharp drop in prices after news broke that the SEC was investigating potential manipulation in the crypto markets. These examples show how news and developments can have a big impact on cryptocurrency prices.
Speculation In Financial Markets
Unlike traditional markets, crypto markets are still in their early stages and lacks the institutional support of more established asset classes. This lack of institutional support means that the crypto markets are more susceptible to manipulation by large players.
In addition, the fact that many investors in the space are speculators can also lead to high volatility. These crypto investors are quick to buy or sell when prices move up or down, which can amplify price movements.
Cryptocurrency Is An Emerging Market
Cryptocurrency is an emerging market that is still in its early stages. This means that there is a lot of uncertainty about the future of the market.
Investors are still trying to figure out how cryptocurrencies will be used and what the long-term prospects for the market are. This uncertainty can lead to volatile price movements.
The Technical Aspects of Cryptocurrencies Can Also Lead to Volatility
Finally, the technical aspects of cryptocurrencies can also lead to volatility. For example, hard forks and soft forks can create new versions of existing cryptocurrencies, which can cause confusion and uncertainty among investors. In addition, changes in the code of a cryptocurrency can also lead to price swings.
All of these factors combined make cryptocurrencies a very volatile asset class. However, it’s important to remember that implied volatility is only a measure of how much the market expects an asset to fluctuate in the future, and it doesn’t necessarily mean that the asset will actually experience those fluctuations.
What’s Next for Cryptocurrency Volatility?
As the crypto market matures, we may see less volatility. This is because more institutional investors, such as hedge funds and venture capitalists, will enter the market. These investors tend to be more stable and less likely to sell their positions quickly.
In addition, as more regulations are put in place, we may see more stability in the market. For example, the Securities and Exchange Commission has recently begun to crack down on fraudulent initial coin offerings. This increased regulation could help to reduce volatility in crypto markets.
Risk V. Opportunity
While volatility can be a risk for investors, it can also provide opportunities to make profits. For example, day traders often take advantage of price swings in the market to buy and sell assets quickly and profit from the difference in prices.
Similarly, investors who are able to correctly predict price movements can also make money from buying and selling at the right times.
Overall, implied volatility is an important concept to understand when considering investing in any asset, including cryptocurrencies. While volatility brings with it the potential for higher risks, it also provides opportunities for those who are willing and able to take on that risk.
As always, it’s important to do your own research and understand the risks involved before making any investment decisions.
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