Volatility Of Cryptocurrency
The terms cryptocurrency and volatility are synonymous. If the stock market was difficult to predict, the cryptocurrency market is much, much worse. But that’s what makes it attractive to many risk-taking youngsters. A well-timed buy of a fashionable cryptocurrency and one could become a millionaire overnight, whereas if someone were to invest in a portfolio of equities, earning millions might just be a dream which they’ll realize in their retirement. Essentially, it is this “calculated” gamble which attracts so much attention to cryptos.
Another thing that makes crypto attractive to youngsters is the relatively simple strategies one needs to employ to earn money. Simple concepts such as “buy cheap, sell dear” work surprisingly well in the world of cryptocurrencies. On the other hand, to make gains in the stock market one needs to have a strong grasp on portfolio management, diversification, technical analysis, and company valuation. The stock market essentially demands patience from its user.
Of course, there are other advantages that make cryptocurrencies popular: anonymity, efficiency of transactions, and security.
Another explanation for the popularity of cryptocurrency would be the pandemic. As more people have to stay at home, they spend their time learning to invest or investing in niche domains. Slowly, these new investors discovered crypto and the rest was social media history. But the question remains: is the future of crypto as volatile as its price?
On Volatility and Risk
When a popular cryptocurrency’s price is compared to that of a stock exchange (Bitcoin and NASDAQ, respectively) glaring dissimilarities pop up. Where the stock exchange indicates a steady growth over the years, Bitcoin shows unstable and unsteady growth. Some years prices shoot up uncontrollably and other years there are severe recessions. On the other hand, the NASDAQ seems to grow steadily, barring a few fluctuations caused by economic instability.
Source: Coin Metrics
Source: Google
The cause of such unpredictability can be attributed to the fact that cryptos aren’t backed by real assets or people. Equities such as stocks are backed by companies whose reliability can be judged by performance indicators and shareholder meetings. But what is tangibly guaranteeing the reliability of cryptos? Apart from blockchain algorithms, there is no human guarantor. That’s why one of the major factors which decide cryptocurrency prices is the vogue surrounding that currency. With nothing else to depend on, investors depend on word of mouth (or tweets *cough* Elon Musk *cough*) to gauge the value of a cryptocurrency.
So does that mean cryptos are just blind gambles? Not necessarily. If an investor can understand the mood of the market, they may be able to make a profit on their investment. In fact, many investors do so by applying natural language processing. NLPs are machine learning algorithms that scan social media for posts and analyze those posts to give a reading on whether the market is bearish or bullish. So essentially, when we can’t use traditional tools to value an instrument or predict its performance, we use more modern tools to do so.
Cryptocurrencies are here to stay, and the lesson we need to learn from them is an ancient one: adaptation is a necessity for survival.
Written by Rayandev Sen | Proofread by Alexey Dudarev and Anuar Burkitbayev
