The term “volatility” implies the changeability of a phenomenon. It can be used in different contexts, but it’s usually applied as a financial characteristic. The term is especially often used today in the context of cryptocurrencies.
In a broad sense, “volatility” means a range of value fluctuations. The same goes for cryptocurrencies. The high volatility of cryptocurrencies is their value volatility, which can rise by 300% in a single trading session and then fall by 400%, or vice versa.
Factors of High Volatility of Cryptocurrencies
Below are some of the factors that affects the price of cryptocurrencies:
News. Media attention, the anticipation of some events, and rumors — these informational effects significantly impact the quotations of traditional financial instruments. In this sense, cryptocurrencies are similar to them.
Market condition. The crypto market continues shaping up, becoming more instrumental, and attracting amateur investors and traders. Demand and supply aren’t stable. Information pressure, such as negative news, provokes a violent reaction. The market volume is still relatively small, so any turbulence has a major influence on the market as a whole.
Low liquidity. Liquidity means the possibility to sell the asset at any time at a reasonable price. For this purpose, there should be a lot of active players in the market who bid both up and down. However, with sharp asset price fluctuations and market underdevelopment, it seems to be impossible. High volatility is both a consequence and one of the reasons for the low liquidity of cryptocurrencies compared to traditional financial instruments.
Lack of a legal framework. State regulation of the cryptocurrency market in most countries remains at the stage of discussing and adopting basic laws. Although the crackdown is already gaining momentum, this sphere still offers wide opportunities for scammers and speculators. Besides, legal uncertainty in many jurisdictions restrains the interest of major investors.
Lack of real value. Currency rates are tied to commodity trading, production factors, macroeconomic statistics, and many other indexes. Stock prices are pegged to the financial performance of companies. Crypto rates are directly tied only to current demand, locally to demand for specific coins, and globally to demand for Bitcoin.
