What is cryptocurrency market volatility - reasons, effects & examples

Table of contents

Love it or hate, volatility is an important part of the cryptocurrency market. Without volatility, there is no market and no profit, but just like volatility gives, it also takes away.

As an investor, you need to learn how to use it to your advantage rather than loathing it. In this article, we’ll answer all of your questions concerning crypto market volatility, and offer some pieces of advice to help navigating these murky waters.

What is cryptocurrency market volatility

When people talk about crypto market volatility they are referring to the amount of risk inherent in trading on the market. Highly volatile assets are considered to have a greater risk because it’s more uncertain in which direction they will move. However, highly volatile assets also come with a bigger chance for reward.

Market volatility is, of course, not reserved for cryptocurrency niche, and every market has its own volatility level. Some markets with lower volatility are generally believed to be more stable, but any market that moves has volatility to some degree.

Market volatility example

Jimmy is interested in a particular token with extreme market volatility. It’s a cryptocurrency that is traded generally within only a few cents, but it goes up and down so much that it’s possible to earn huge percentages in a limited time frame (or lose it as well) because of this volatility.

Jimmy has been watching the chart swing up and down for a few days, and he decides to make his move. He purchases 10,000 tokens for 0.01 cents each. Before the end of the day, the trading activity has kicked up again, and his tokens are now worth 0.02 cents.

Using market volatility to his advantage, he flips his tokens for a very nice profit. Keep in mind that Jimmy’s very volatile investment could’ve easily gone down as well, and then his profit quickly turns into a loss. Volatility can be fun, but it can also be painful.

Crypto market volatility reasons - what causes it

It is caused by many things. General market activity will, of course, move the price up and down, but there’s normally an underlying factor to this. In many cases, this is driven by the media or news items released about projects.

These can inspire either optimism or pessimism from investors, and this can, in turn, cause them to adjust their bids. If things get a little too pessimistic, then other traders will follow suit when they see a sell-off about to happen.

Sometimes crypto market activity is manipulated, and investors should watch out that they are not being taken for a ride. Particularly if they are trading assets with small market caps like in our example above, these small markets can be moved easily with only small buys or sells.

Why is market volatility important

Volatility is needed to make profit. In fact, high volatility is what attracts most people to trade cryptocurrencies in the first place. They are not looking for safe assets, they’re looking for assets with the capability to make them a lot of money. Assets that have no volatility don’t have as much room to make profit from trades.

How can it be measured

There are actually a few tools that will help you to do this. They are called Cryptocurrency Volatility Indexes, and they can measure the volatility of the entire crypto market. It works by following the volatility of what is called “first tier cryptocurrencies” and analyzing its charts. First tier is really just another word for large-cap coins, and these tools tend to track assets like Bitcoin, Ethereum, XRP and Bitcoin Cash for market health reports.

What effect cryptocurrency market volatility has

Too much volatility can, of course, have a negative effect on markets. Bear market, which followed enormous gains that brought investors running, has also sent them to run the other direction. Huge drops scare these investors, and trading volume of the entire market is negatively impacted because of it.

When will crypto market volatility end

For market volatility to end, for good it would likely take more regulation and liquidity. Markets with more players tend to be steadier. This is because it takes larger trades to move the market. Though many people probably don’t want it to end, because that would take away their ability to make large sums of money playing a largely unregulated market.

Is market volatility good or bad

Market volatility is both a blessing and a curse. Without it, cryptocurrency would not have even blipped on the mainstream radar, and all of those fabulous gains wouldn’t be possible.

However, it can, of course, be dangerous too. As an investor, it’s your job to use that volatility to your advantage without getting burned, or too burnt at least. You can do that by being careful with your investments and planning ahead for the future.

How to predict it

Predicting market volatility is difficult, and it’s not a sure thing. To prepare yourself it’s important to keep an eye on the news and to judge current market trends. Keeping an eye on what Bitcoin is doing is important because other cryptocurrencies will always follow it. Look for signs of strengthening or wavering support to let you know whether things are about to look very green on the charts or if the floor is about to fall out of the entire market.

Market volatility vs liquidity

Liquidity refers to the availability of assets within the market. When traders talk about liquidity, they are talking about the ability for orders to be filled easily. It refers to how many traders there are and what type of volume they are trading.

Volatility refers to how drastically those markets change, and markets with lower liquidity tend to have larger swings in price. This is because it takes less money to move the market. For this reason, small-cap assets can be the most profitable, but also the most unpredictable.