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Last year was the least volatile stock market history of decades. Traders who have historically benefited from price fluctuations have entrusted their work to high frequency trading algorithms managed by computers acting at millisecond. On Wall Street, humans are a commodity replaced by machines, and yet four years of volatility on the stock market can be covered by a month of price movements in the cryptocurrency markets.
a fact, but exactly why is this class of assets more volatile than any other liquid asset on the market?
1. No intrinsic value
Despite the size ratings of the company, cryptocurrencies do not sell a product, do not generate revenue or employ thousands of people. In general, they do not report dividends, and just a tiny fraction of the total value of the currency goes into evolution. For this reason, it is difficult to evaluate. How do we know if it is overbought or oversold? When is it good value for money or too expensive? Without basics to base this information, we can only rely on market sentiment, often dictated by the media that make money on the number of viewers.
2. Lack of regulatory oversight
Cryptocurrency is a global phenomenon, and while governments are cracking down on industry, regulation is still in its infancy. This limited regulation allows market manipulations which, in turn, introduce volatility and discourage institutional investment, because a large fund has no assurance that its capital is really safe or at least protected against so bad actors.
Lack of Institutional Capital
It is undeniable that some fairly successful venture capitalists, hedge funds and wealthy individuals are both fans and investors in crypto, most of the institutional capital remains on the sidelines. At the time of writing these lines, we have a limited impulse on a crypto ETF or a mutual fund. Most heads of banking admit that there is some validity in the space, but they have not yet committed significant capital or public participation. Institutional capital comes in various forms, such as a large trading desk that has the potential to introduce efficiency and reduce market volatility or a purchase of mutual funds on behalf of their clients. long-term investors.
Thin Order Books
Crypto investors are taught never to keep coins on an exchange, which can be hacked. As a result, most of the tradable offer is not in an order book but in over-the-counter portfolios. In contrast, almost all tradable shares of a publicly traded company are traded on a single stock exchange. A large market order can cause a rise or fall in the order book, which causes a “slide”. We have seen an exaggerated example in the crash of GDAX Ether, but less extreme versions occur daily. Because of the ability of large traders to move the market in both directions and to resort to tactics to encourage them, volatility increases.
5. Long-term versus short-term
If you invest in something that you do not plan to withdraw until you reach the age of 60, you are probably less concerned about its daily or even annual price movements, you are less likely to trade it. Cryptocurrencies, for the most part, can not be purchased in retirement accounts and are generally inaccessible to brokers and financial advisors, so an entire ecosystem of investors is excluded. This leaves us with early adopters who are comfortable with the barrier of portfolio technology, and web-based trading platforms, the same ones that refresh Blockfolio every 10 minutes, cracking each other. each other when the coins panic when the price drops. These are the same people who do not have the discipline to buy and hold long-term, and therefore contribute to the sale of panic or FOMO purchases.
6. Herd Mentality
Crypto is largely a millennia-old phenomenon, which mistrusts the government, is early adopters in technology, and has been mostly avoided gains from 39; investment earned over the last decade of rising real estate and stock prices. But most members of Generation Y do not have the long-term investment experience of their more mature generational counterparts. They also tend to have less disposable income due to a historically poor employment economy and less time in the labor market. This combination of factors leads to a number of things; an appetite for risk in the hope of obtaining a manna of money and using a larger share of capital than they have to invest in risky instruments, including the purchase of these investments on credit. When the market collapses, it is money that they literally can not afford to lose, so they will fall at the first sign of trouble. As it is about reactionary behavior, they will usually lose money before leaving the market. When the market starts to explode, they will buy with the money that they do not have. As a group, it seems to be mass coordinated, but these are just the motivations of many individual entities that propagate in a herd mentality. If you associate this behavior with the fluctuations caused by big whales in a poorly negotiated market, you have a synergistic effect.
When Volatility Decreases
Over time, one can expect more regulation, greater diversity of investors, and a more mature perspective on the crypto market. We can also expect a higher utility value, as traders find more accessible ways to accept cryptocurrency, and the technology behind the transactions also improves. Although volatility may decrease, we can also expect a gradual but steady increase in the value of the cryptocurrency market as a whole. Just as the stock market has given way to long-term holders, so will the cryptocurrency markets. At the very least, it seems to be something that will be there for the long term.
The opinions and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.