If you’re a crypto investor, you’ve probably heard about the term volatility. Cryptocurrency is highly volatile, and on the same note, it can create significant gains in short periods.
Volatility is measured in various ways. First, let’s go into the first measurement method, Historical Volatility. This refers to observing past changes in the market and, therefore, the asset’s price within a period. Second, we have Implied volatility, predicting the movements within a market. The term implied is because there is no way to know for sure, but we can assume and predict what will come ahead of us.
How to measure volatility?
A method of measurement known as “beta” measures how volatile one stock is, compared to the market as a whole. Another way is measuring the deviation of a specific asset. From this, one can tell how much the price was affected.
What causes volatility?
There are various points that may cause volatility. One of the most common is supply and demand. The more people buy a certain asset the higher the price will go because the demand has increased. Speculation and Hype can also take a toll on the volatility of assets and the market. The announcement of a new asset usually brings with it the rush and excitement of buying and selling the new coin. This drives the price to its peak and eventually, the bubble pops when people realized the coin is overvalued or they have lost money from it.
The cost of production is another major factor that can affect volatility. The cost of token production comes with two main factors, the network hash rate and the power consumption of the network. It becomes harder to mine and less profitable for miners to keep mining a given cryptocurrency.
If mining becomes ineffective, miners can potentially give up and migrate to a different cryptocurrency. The volatility occurs if miners switch to more profitable tokens or hold onto tokens for longer. The competition between assets takes a big toll on volatility as well.
Conclusion
Volatility is quite essential when examining the risks of an investment. Investors are to diversify their asset classes to prevent its risks. They might also consider combining their assets in the risky stock market with those in the less volatile bond market. Some cryptocurrency investors believe that volatility is part of the game and that this is why large profits are possible.
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