Marc Serafino
Cryptocurrencies and volatility go hand in hand, and there’s nothing wrong about it. The fact that the price of these digital assets varies a lot is something you/we should accept — otherwise, there wouldn’t be room for big returns.
As of 2014, Bitcoin — which is the world’s first cryptocurrency — had volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the U.S. dollar, according to risk management expert and faculty member in the Finance Department at Boston University, Mark T. Williams.
It is important to understand this volatility so you don’t panic when the price starts to change. Here are 5 things everyone should know about it…
1. Bitcoin is the least volatile cryptocurrency
Bitcoin is the least volatile cryptocurrency and is often referred to as “digital gold.” There are many reasons why would you want to compare Bitcoin to gold, including its limited supply and the fact that is not easily mined — and will only get more complicated.
Also, because it has been around for the longest period of time works to Bitcoin’s favor. It is still more volatile than any fiat currency out there, but in this market – Bitcoin is a beacon of stability.
Bitcoin is also the most liquid cryptocurrency and you can exchange it for any major fiat currency in the world. There are thousands of Bitcoin ATMs (BTMs) installed all around the globe that let you instantly sell your digital assets for cash. To be fair, many of these BTMs also support other cryptocurrencies.
2. Bitcoin moves together with other cryptocurrencies
The price of bitcoin is seldom, if ever, the only one affected — in most cases, we see the value of all cryptocurrencies fluctuating alongside bitcoin.
The only exception is Ethereum which has been gaining traction in recent months; its price has fluctuated independently of Bitcoin, with Ethereum news pushing its price up and down. Mostly, it was related to Ethereum’s adoption by major organizations through the Ethereum Enterprise Alliance.
3. High volume commonly coincides with price changes
This is the case with pretty much anything that is traded in the world, but with Bitcoin — this is even more so. Bitcoin’s “problem” — and also the “problem” with all other cryptocurrencies — is that there is no governing body behind it that could ease the situation on the market. So when markets panic, prices can drop massively to further bring in more sell orders as everyone tries to close their positions.
Something similar could happen to companies’ stocks, but there are dealers that act as “market makers” to stabilize the situation by always having the buy and sell prices. With Bitcoin, we don’t have such players though there are those who are trying to influence the market and reap big rewards afterwards.
The common sense advice is to tune in to what’s happening on the market, and buy when the price is low. Buying bitcoins is a form of an investment, after all.
4. You can trade on Bitcoin’s volatility
You can trade on Bitcoin’s volatility via options, which pay you when a certain price condition is met; for instance, when the price of Bitcoin hits an upper barrier.
In the world of digital assets — and in some other situations — options are used for speculation or hedging.
At the moment, there are only a few places where you can trade with Bitcoin options, though we expect the number of companies offering this service to grow in the months to come.
That being said, the fact that you can trade Bitcoin options is important; generally speaking, the appearance of options shows that liquidity of Bitcoin has increased.
5. Bitcoin could match the volatility of major fiat currencies
We’re still not there; heck, we’re still not even close to the moment when Bitcoin’s volatility will match the one of major fiat currencies.
Nonetheless, we have seen the world’s affairs having a more negative impact on fiat currencies than on Bitcoin. And at some point in the future, the parity could be reached. It may take 5 or perhaps 10 years, but chances are that with mainstream consumers starting to adopt cryptocurrencies, Bitcoin will stabilize at some point.
In the meantime, you have to ask yourself — can you afford to miss the boat? It’s still not too late to join the (cryptocurrency) game, so hurry up…
