Crypto’s volatility is one of the most common criticisms leveled against the asset class. But while some people might think that the market is always moving up and down, several factors keep crypto markets from being completely stable.
The first factor is that cryptocurrencies aren’t centralized in nature. While many companies provide blockchain solutions and support, none of them control the majority of the network. This decentralization leads to problems because it makes it difficult to predict how much value a coin could lose or gain over the course of a day, week, or month.
Another issue is that the number of cryptocurrencies available far outnumbers their demand. In fact, according to CoinMarketCap, there are now more than 2,500 different cryptocurrencies available. With such a wide variety of options, it becomes difficult to determine which ones will survive in the future.
A third problem stems from the fact that most cryptocurrencies require massive amounts of computing power to mine. Because of this, miners often use specialized hardware to secure networks and compete for rewards. When the cost of electricity increases or the equipment breaks, miners can quickly find themselves losing money.
Another reason cryptocurrency is volatile is that the market itself isn’t necessarily stable either. As we’ve seen throughout history, financial bubbles can form and burst within minutes, days, or even weeks. Investing in gold or traditional assets may make sense if you’re looking for a safe haven during turbulent times.
What Volatility Means to Investors
Volatility is one of the most common fears associated with investing. Many investors are concerned about how much risk they take when investing in stocks. They worry that if the market drops, they’ll lose everything. But what does “volatile” really mean?
In simple terms, volatility is defined as the amount of fluctuation in the price of a security over a given period of time. For example, a stock might go up 10% during the day but drop 5% overnight. This could cause the stock’s daily percentage gain to fall below zero. However, if you had invested $100 in that stock yesterday morning, you’d feel pretty confident that you’d still make some money today. After all, it went up 10%. But what if it dropped another 5%? You’d probably want to sell now because you’d lost half your investment.
The key word here is “regular.” A stock that goes up 20% one week and down 30% the next isn’t volatile; it’s just unpredictable. And while volatility doesn’t necessarily mean that something is likely to happen, it provides information about how much change there is in the future.
If you’re looking for low volatility, look for assets that tend to move relatively consistently. These include bonds, commodities, currencies, real estate, and precious metals like gold and silver.
Is Volatility a Bad Thing?
The world has become much better at understanding the costs of volatility. We’ve seen it on Wall Street, we’ve seen it on Main Street, and now we see it in the cryptocurrency markets. But there are still plenty of people out there who don’t fully appreciate how volatile cryptocurrencies can be. They just assume they’ll always go up because that’s what they see happening in the real world.
But here’s the thing about volatility: it’s not something you can avoid completely. There’s no way to guarantee that a cryptocurrency won’t lose half its value overnight. And while you might think that volatility is bad, the truth is that it’s actually good for some investors. In fact, it’s one of the reasons why cryptocurrencies are such a great investment opportunity.
Cryptocurrencies offer investors the chance to participate in the riskier parts of the financial system without having to worry about losing their money. If you want to invest in stocks, bonds, forex, commodities, or venture capital, you can find ways to make those investments safer. You can buy insurance, diversify your holdings across different companies and countries, or even hedge against price drops. Cryptocurrency offers none of that. Instead, it lets you take a lot of risks.
And that’s where the appeal lies. When most people hear the word “risk,” they think of things like getting sick, unemployed, or dying. Of course, those are pretty serious concerns. But volatility isn’t nearly as scary as those things. Because volatility doesn’t mean you’ll lose everything; it simply means you could end up with less.
In other words, volatility is the cost of doing business. So rather than trying to eliminate it, regulators have taken a very simple approach. Rather than try to prevent volatility altogether, they’ve focused on ensuring that volatility is predictable. After all, if you knew exactly what kinds of losses you’d face each day, you wouldn’t feel compelled to gamble in the first place.
So far, that strategy seems to be working. As long as you know what to expect, volatility becomes much easier.
Why is Crypto so Volatile?
Crypto often gets compared to gambling in terms of volatility. In fact, one study found that the average cryptocurrency investor loses money every year. However, there are several reasons why crypto is actually less risky than traditional investments like the stock market.
First off, the crypto markets are much smaller than the traditional financial markets. The total value of cryptocurrencies today is around $200 billion. Compare that to the current global GDP of $80 trillion, and we see how small the crypto market really is.
Secondly, most people consider Bitcoin the currency of choice for online purchases. But in reality, just over half of all transactions happen on exchanges, while the rest are on peer-to-peer networks.
Lastly, crypto traders don’t have to worry about insider information or corporate fraud. Most major companies now offer some form of blockchain technology, allowing them to track everything that happens in real time.
Cryptocurrency is Still an Emerging Market
The cryptocurrency market is still very young, despite what you might hear about the bubble bursting. In fact, according to CoinMarketCap, the total market cap stands at $804 billion, while the number of active wallets is just above 200 million.
Even at its peak, the crypto market was only around $832 billion, less than half of today’s value. At the height of the dotcom boom during 2000–2001, the NASDAQ index reached nearly 10 times current levels. So, even though many more people are invested in these digital assets now than there were 15 years ago, the market is still quite small.
This relatively small market size means the impact of individual events is much greater here than in traditional markets. For example, if one group of investors decided they wanted to dump $500 million worth of gold, it wouldn’t make much of a difference. But if the same thing happened to Bitcoin, it could cause prices to drop dramatically.
Institutional investors still retain the majority of the market when it comes to market share prices. This doesn’t mean crypto isn’t a risky investment when approached improperly. Any speculative investing done without research risks bleak returns. EndoTech Algos investments provide an opportunity for crypto investors even in a volatile market. Learn more here.