Cryptocurrency Volatility – a Friend or a Foe
September 20, 2019, India’s stock market skyrockets after Finance Minister Nirmala Sitharaman announces fiscal reforms and surprising tax cuts. BSE’s Sensex notched 2000 points (~5%) on a single day which is its biggest gain since May 2009. It climbed another 1000 points today (Sept 23, 2019) when the market opened. Such positive explosions on the market are perceived with optimistic sentiments among traders and encourage them to get more involved in the trading activities. However, this blast is a tiny spark compared to the cryptocurrency markets.
Cryptocurrency is condemned across the world for its ‘outrageous’ volatility and this usually petrifies new entrants before tasting the delicacies of the cryptocurrency markets. Seeing tall red spikes on the charts with a double-digit negative percentage change in the prices induces heavier fright in people than similar positive percentage change, and this is where negative bias kicks in.
30 day BSE Sensex chart showing BSE’s volatility
30-day BTC/USD chart showing BTC’s volatility on CoinDCX’s platform
Volatility has a momentous role in any trading market and to understand this, we need to understand what volatility is. In traditional finance, volatility is described by the extent to which an asset’s price fluctuates over time. In a 24 day trade, it is defined as the dispersions the price of an asset has shown from its starting price. An investment is considered volatile if its prices move aggressively up or down daily, as can be seen in the cryptocurrency market. Here’s an illustration which differentiates high and low volatility assets:
Volatility explained (source – masterthecrypto.com)
Bonds and Gold are relatively stable investments with teensy movements. This gives the traders a valid argument to not call Bitcoin ‘Digital Gold’, at least till the time its volatility is not reduced. Stocks and derivatives are categorized under high volatility investments and trillions of dollars have been still invested in this category. This proves the hypothesis that it’s not volatility which has scared traders from entering cryptocurrency markets, it’s the fear of sudden heavy loss. Volatility is directly linked with risks and returns associated with it.
For investors and traders, understanding their risk tolerance is always the first step before engaging in any form of investment. Different individuals possess a different level of risk tolerance, and this affects their choice of investments. It will be natural to see a 25-year old growth-focused investor taking higher risks than a 60-year old retired investor who is investing only for preserving his wealth. Risk is directly proportionate to the returns and this is the exact point with which the importance volatility can be explained.
Volatility, in simple words, is the movement in the markets. If there will not be any movements, the investor will not lose any money, but will not gain any either. Looking at the price of HDFC stock for the last 30 days, the price dropped fro, Rs 1250 to Rs 1070 in the span of 20 days which is a loss of 14.4%. It jumped back to Rs.1210 (12%) in a day. An inactive trader will see the net gain of only Rs. 40 when bought at the highest price and sold at the current price. On the contrary, a smart investor knows when to pull out his investments (~1240), buy stocks of worth 1240 at 1080, and sell again at 1240. The total profit in this scenario will be approximately Rs. 170. These high-volatile events come once in blue moon in stock markets timeline but appear like dusk and dawns in crypto markets. This timely exiting of the market is a common strategy used by traders to maximize their gains.
30-day HDFC Bank technical chart
In the cryptocurrency markets, this volatility has possibly caused losses to investors, but it has also turned investors, millionaires, to billionaires ‘overnight’. It is still naive to be adopted as a mainstream currency in society but possesses the substantial potential to become an investment vehicle to help investors gain profits. Swing traders are traders who trade hold assets for slightly longer than a day consider. These traders look for opportunities in the market to strike the trades to a home run and it’s this volatility which gives them these opportunities.
Hence it is an advice to all the CoinDCX users to understand that Volatility is an important market concept to make yourself aware of before entering the roller-coaster rides cryptocurrencies can take you on. It is a double-edged sword that brings a high risk of losing as well as winning a notable amount of capital. This is a part of the reasons why despite being volatile, Bitcoin is the best performing assets in the last 2 decades. But with this fact, we also advise our users to trade and invest with caution and try to keep their risk tolerable.
Profits are never guaranteed when trading, you can take steps to protect yourself from heavy losses using ‘STOP’ and ‘LIMIT’ order features offered on CoinDCX’s platform. If you are not an early investor and missed out on the bottom prices you can still buy during the occasional dips, however just because you didn’t buy a coin at it’s the lowest price that does not mean you are late. So deposit your cryptos now, devise your strategies based on market conditions, and make profits now.