Why IS the cryptocurrency market so volatile?

Feb 28, 2018 at 21:27
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When you compare the volatility in the stock market to the cryptocurrency market, you’ll find that it was the least volatile stock market in decades. Traders who have previously made money from price swings have all but given their jobs to computer algorithms called high-frequency traders that operate on a millisecond levels. On Wall Street, humans are constantly being replaced by very smart computers, and yet 4 years of volatility within the stock market is the equivalent of one month of price movements in the cryptocurrency markets. We’ll take a look at why this market is more volatile than most others.

 

No Intrinsic Value

Regardless of company sized valuations, these cryptocurrencies aren’t selling any products, they don’t earn any revenue or employ anyone. They don’t really return any dividends, and just a tiny amount of the total value of the currency goes into evolving it. The result of this means it is hard to put a value on it. How can we know whether it is overbought or oversold? When is it priced just right, or when is it too much? Without fundamentals in place to base this information off, we can merely rely on the current sentiment of the market.

 

No regulatory oversight

The rise of cryptocurrencies have taken over our lives, and whilst many governments are beginning to clamp down on the industry, any sort of regulation for this market is still in its infancy. Because there is so little regulation it allows for market manipulation, which results in plenty of volatility and actively discourages institutional investment. This is because large funds have no assurances that their capital is actually secure.

 

No Institutional capital

While you can’t really deny that there are some pretty darn impressive venture capital firms, hedge funds and high net-worth individuals are fans as well as investors of cryptocurrencies, as a segment, most of the institutional capital is on the sidelines, mainly because it is the safest place for it right now. Currently there is little or no momentum regarding a crypto ETF or mutual fund. Most banking officials have admitted that there’s some validity in the space, but haven’t committed a significant amount of capital or participation publicly. Capital of this kind comes in different forms, which include a large trading desk that has the potential to introduce efficiency and soften market volatility, or a mutual fund buying on behalf of their investor.

 

Thin order books

Cryptocurrency investors and traders alike are taught right from the get go that keeping their stash of tokens or coins in an exchange is a no no! An exchange can be hacked, like Coincheck which was the subject of a cyber attack where thieves stole 58 billion yen worth of cryptocurrency. By heeding this advice practically all traders now keep their stash in wallets, whether that be desktop or hardware. A large market order can eat into an exchanges order book on the way up or down, and this is known as “slippage”. A prime example of this is the GDAX Ether flash crash.

 

Inexperienced vs the Experienced

The typical way to invest into something is to make the initial investment and then leave it and forget about it 50+ years. Adopting this strategy for the long term means you aren’t as concerned about the daily price movements. Cryptocurrencies on the other hand are impossible to buy using retirement accounts and are generally aren’t accessible to retail brokers and financial advisors. This leaves us with early adopters that are comfortable with the technology hurdle of dealing with the likes of different wallets and web-based trading platforms. On the flip side, we have the people who are constantly refreshing the platform every 5 minutes to see if they have made any money yet, cheering when they have and going into a cold sweat when price tanks.

 

Millennial Mentality

There’s no doubt about it that the rise of cryptocurrencies are mostly following by millennials who have a strong dislike and definitely don’t trust their government. These are the early adopters in tech and other areas, but a lot of millennials don’t have the long-term investment mentality or experience as opposed to their much older and wiser generation. Studies have found that they also tend to have less disposable income as a result of historically poor job economics, and less time in the workforce. The factors mentioned just then result in a few things; an appetite for risk with the hope of landing a windfall of cash and using a larger share of capital they have at their disposal to invest in risky assets, including making purchases of investments on their credit cards. If in the event of the market dumps this is money they literally cannot afford to lose, so they will get out as soon as possible if they think things aren’t going their way.

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