Volatility. This word is almost synonym for instability, unpredictability… something that cannot be relied on. Would you bet your money on something that constantly changes, almost at random?
Simply put, volatility refers to the price change of a market entity over a period of time.
That is why many thinks that volatility is the worst enemy when it comes to the stock markets. And, in fact, the equities markets are quite stuck, with only 6.8% volatility in the year 2017. Those markets are becoming predictable. You might think it’s a good thing, right? Well, not if you are a trader: there is no need to hire someone for navigating through a turbulent ocean with unpredictable waves if there is actually a flat, calm sea.
On the other hand, there is a place where the sea is the opposite of calm: the cryptocurrency market. It is almost daunting how extreme the movements in this market are, it moves erratically like a headless chicken.
Why are those swings so extreme?
One factor is its lack of intrinsic value. Cryptocurrency is not an actual product nor is it a company that hires people, so it is difficult to evaluate its price – hence, the market’s “sentiment” takes over and the emotional swings.
Another element to keep into consideration is that cryptocurrencies are still not consistently regulated worldwide. Yes, some countries have started the process or are at least considering it, but all of that is still in early stages and this obviously affect how the market reacts.
Then, how is this volatility a positive thing?
There are ways to use the volatility of the crypto market to one’s advantage and trade with minimal losses and the possibility for profit.
For those who invested their money in a long-term entity, and we could be talking 50 or 60 years, the daily fluctuations of the market will not be a train smash at all.
When trading, however, the situation changes drastically. Far from such things as a 50-year-investment, crypto traders work with minutes, even seconds! Cryptocurrency is a very much short-term type of investment so obviously even the slightest swing can affect, positively or negatively, the investment.
So when, for example, using your City Index account to do spread betting or CFD trading cryptocurrency, keep in mind that you won’t actually be buying values in cryptocurrency but speculate on the market’s movement. That is where volatility comes into play! A high volatility will often generate good gains, if you know how to read it.
One more factor that we would like to highlight: when the crypto market becomes more regulated or, for example, digital currencies start being more widely accepted from shops and merchants, we can expect its volatility to decrease. Therefore, if you’re thinking of starting trading there, we suggest you don’t waste time!
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