From Lack Of Regulations To Speculation: Why Crypto Is More Volatile Than Stocks

Both crypto and market experts tell CNBC that this is the new normal of investing, and traders should just get used to it. With a market cap of about $825 billion, bitcoin accounts for less than 0.1% of all of the world’s aggregate wealth (somewhere north of $1 quadrillion). Other competing stores of value include gold, bonds, real estate, and high art. Finally, the Bitcoin markets are constantly becoming more efficient.

Bitcoin is a small market of digital assets with a lot of speculation and the media has a huge influence on where the values trend. Speculators and investors are always scanning the headlines for the next big story that will either rocket or wreck the market. When something does emerge, everyone understands that it’s a race to buy or sell. In truth, cryptocurrency is one of the most volatile non-derivative financial assets on the market. Despite having by far the largest market liquidity of any cryptocurrency, it’s also times greater more costly than fiat currencies.

Most cryptocurrencies have been in the market for just over a decade, which also results in high volatility.

While only wrapped ETH was affected in this hack, similar vulnerabilities could exist on other blockchain networks that use this same cross-chain structure. China’s government and central bank announced in 2021 that all cryptocurrency transactions or facilitation were illegal. Bitcoin mining was cracked down upon following a meeting of the State Council Financial Stability and Development Committee in May, which resulted in a massive shutdown of cryptocurrency mining farms in the country. When media outlets announced Proshare’s introduction of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks. Investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange, causing a price jump to more than $69,000. Bitcoin volatility is also partly driven by the varying belief in its utility as a store of value and method of value transfer.

Over the coming period, with the adoption of cryptocurrencies exponentially rising, we are bound to witness the volatility dropping. There are many benefits to being a crypto enthusiast, especially Bitcoin, whether you’re in it for the short or long term. But there’s a flip side while making your way to financial freedom with Bitcoin — you must consider the price fluctuations. These two asset classes illustrate the actual performance of the U.S. dollar versus bitcoin over the past 10 years. For example, $10,000 ten years ago would have the purchasing power of only $8,070 today as measured by the consumer price index, an erosion of over 19% of its value. While volatility is typically not something that is desired by investors, it is helpful to question whether or not it matters for a core investment thesis.

Custody and Trading Platform

This means that typical valuation methodologies, such as discounted cash flows, cannot be used to quantify it. While Bitcoin is frequently compared to gold in terms of being a “store of value,” it lacks physical existence. This gives a chance for investors to keep up with the latest developments in order to make informed decisions.

There is no change in supply to dampen the effect of price moves, even over the longer-term. But to Bucella, this type of volatility is a gift that most fund managers in traditional markets would salivate over. “As a fund manager, with proper risk management, infrastructure and tooling, this level of volatility presents enormous opportunity,” said Bucella. The following information is for educational purposes only and does not constitute an endorsement of this type of Cryptocurrency.

Bitcoin, which has increased in value by approximately 50x in the last five years, is considerably more volatile than most other assets, such as debt or equity. Volatility may indicate the potential for above-average returns on a trade, but it is also one of the main indicators of risk. This can make a Bitcoin investment less predictable in the short-term compared to other investments. Bitcoin volatility is also driven, to an extent, by these investors. It is unclear how Bitcoin whales—investors with BTC holdings of a minimum of 10 million—would liquidate their significant positions into fiat currency without affecting Bitcoin’s market price.

Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high-risk tolerance. Investors in digital assets could lose the entire value of their investment. This material is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Some of this information is forward-looking and is subject to change.

The size of these incentives declines with time, so each completed transaction compensates miners less than it used to. The route to accurate price discovery is frequently paved with seismic price fluctuations. Additionally, many cryptocurrencies are marketed as speculative investments, which attracts investors looking to make quick profits.

Bitcoin Regulation

But volatility is also the price that bitcoin investors pay for its limited supply and its lack of a central bank to control that supply — precisely the features proponents say give it value. The market moving potential of individual holders is likely to decline as the asset grows. As Bitcoin becomes more expensive, it will require a larger amount of fiat currency to put upward pressure on the market price. Large individual holders will still have the ability to increase sell pressure drastically, putting downward pressure on the price.

Investors are gaining access to new forms of exposure and the markets are increasingly efficient. Efficient markets will allow large trades to occur without outsized impacts on the Bitcoin price. This may not affect the macro trends of Bitcoin’s price, but it will help prevent large swings crypto volatility tracker on any given Bitcoin market. ➤ Learn more about how Bitcoin’s market cap compares to other assets. Volatility is a measure of the variance in an asset’s price in relation to its average price over time. Assets that fluctuate significantly in price are considered more volatile.

There are measures, such as dollar-cost averaging, that can be used by less risk-averse investors to mitigate the detrimental impact of volatility. Long-term investors who have solid reason to assume that an investment will eventually rise in value don’t need to worry about short-term volatility as much. There are currently stable coins, which are cryptocurrencies particularly engineered to have low volatility and have their price pegged to a reserve asset such as the US dollar. Unlike other asset classes that are governed or controlled by any institution, Bitcoin is not governed or controlled by any entity. This is what makes crypto different from fiat currency, stocks, or bonds.

• So, your risk tolerance and goals will be your best guide in making this decision.
• Furthermore, as a hypothetical let’s say there were two very different asset class choices.
• “As a fund manager, with proper risk management, infrastructure and tooling, this level of volatility presents enormous opportunity,” said Bucella.
• Over the coming period, with the adoption of cryptocurrencies exponentially rising, we are bound to witness the volatility dropping.
• In conclusion, we think it is helpful in times of high volatility for investors to revisit some of the seemingly basic foundations of bitcoin’s properties and why it is so volatile.

We believe that these holders may be more willing to hold onto their bitcoin than they would have been if they purchased it at a lower price. Today, MVRV is at levels not seen since this past summer’s price bottom. In recent months, MVRV has declined due to realized value remaining relatively stable while the market price of bitcoin has declined. The smaller market and recent creation of Bitcoin means that the markets and financial products that support Bitcoin are underdeveloped. Compared to assets like stocks, Bitcoin is very difficult for investors to gain exposure to.

Some may have purchased and held at different times, while others may have first traded it before choosing to make a long-term allocation. The point is that something that has low volatility is not necessarily a good store of value in the long run, while something that has high volatility does not mean that it can’t be a good store of value in the long run. Bitcoin is unique in that it is a good whose supply is completely inelastic to changes in price. In other words, supply does not (and cannot) change in response to price. Therefore, all changes in demand for bitcoin will be reflected by changes in price.

The decentralized nature of cryptocurrencies is another factor that contributes to their increased volatility. Unlike traditional stocks, which are often subject to government regulations and centralized market forces, cryptocurrencies are decentralized and operate independently of any central authority. Investors may buy or sell cryptocurrencies based on rumours, news, or simply their own speculation about the future value of the asset. This type of investment behaviour can result in rapid price movements that are not necessarily based on the underlying value of the cryptocurrency. Professional money managers and corporate America have flooded the market in the last year, and they’re still getting started.

India Changes Course from Digital Asset Bans to Regulation

These markets are usually owned by a company who pairs buyers and sellers of different assets and maintains the market’s fairness. Many of the factors that drove Bitcoin’s volatility in the past will become less relevant as time goes on. Countries around the world are progressively adding rules to govern how their citizens can https://www.xcritical.com/ use the currency. As the long-term regulations around Bitcoin become more clear, price volatility should decline. Government agency views of cryptocurrency can also affect Bitcoin’s price. For example, the Internal Revenue Service (IRS) considers Bitcoin a convertible virtual currency because you can convert it to cash.