Cryptocurrencies are digital currencies secured with cryptography. Unlike fiat currencies cryptocurrencies are decentralized, this means they do not have control or decision making from a central entity, hence making cryptocurrency more trust worthy. However, cryptocurrency volatility has been a major concern for crypto currency traders, investors and investment analysts worldwide.
Understanding cryptocurrency and volatility
Cryptocurrencies are notorious for their volatility, and this usually scares new entrants into the crypto world when they see negative changes in prices. But is cryptocurrency volatility bad for trading activities? Although a negative change will
induce fright in people compared to a positive change in price, however some see cryptocurrency volatility as an opportunity to profit from the price actions.
Therefore 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. It is the extent of which the price of an asset moves up and down over time and an asset is considered to be risky if it is very volatile. Extreme volatility occurs when an asset’s price changes rapidly within a short time.
How does this affect traders and investors?
Cryptocurrency volatility plays an important role in any trading market. Volatility is
the price that crypto investors pay for its limited supply and its lack of a central bank
to control that supply. These price action creates the opportunity for profit in the
cryptocurrency market and crypto traders look out for such opportunities, these fluctuations allows for strategies like “buying the deep” because crypto traders
knows that the price fall is just for a short time and see this as an opportunity to make profit when the price moves back up.
Volatility, in simple words, is the movement in the markets and these movements
allow for losses and profits depending on how the trader or investor engages. 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.
Cryptocurrency compared to government bonds are very volatile and bitcoin is the
most volatile of all cryptocurrencies, it is probably true that cryptocurrency volatility
has caused traders and investors to lose money, but it has also turned many traders
and investors into millionaires and billionaires within a short period of time. Hence it is advisable to take precaution to protect yourself from loses because there is no
guarantee of profits when investing or trading cryptocurrencies.