Are you going to say that you have never been lost in the complex terms of the financial market? Because our intention here is to uncomplicate. A term that always causes fear is the so-called volatility and here comes the question: why is the crypto market so volatile? Well, volatility measures the intensity with which the price of an asset varies and when it comes to digital currency, this happens all the time.
Of course, some assets by themselves already have high volatility, and carry high risk with them. The same happens in reverse, but cryptos fit the first case. Take advantage and first of all press play here, in a video in which our Head of Variable Income Nicolas Farto mentioned 3 cryptos that you need to keep an eye on in 2022:
What we will see in this article:
What are cryptocurrencies?
In short: it is the native asset of a blockchain network, where it is directly part of the blockchain on which it runs, also called native currency. Cryptocurrency comes from an independent digital system and thus allows users to send and receive transactions without intermediaries. Therefore, when carrying out a transfer, it is recorded in a ledger, which is digital, public and unalterable.
In addition, cryptocurrencies often have the following characteristics:
- Uses encryption to protect the network structure and system;
- They are decentralized and work through computer code;
- They are built on a proprietary blockchain.
A curiosity is that some cryptocurrencies with their own blockchains can also be copies of another cryptocurrency, just with something else in operation, copies of Bitcoin, for example.
- Litecoin – The novelty is the code change for faster transactions. While Bitcoin has a 10-minute deadline to confirm transactions, Litecoin only needs two and a half minutes;
- Dogecoin – Even faster, the change is to confirm transactions in less than a minute and also have infinite coins;
- Dash – The difference in operation is in the way it is minerals and code changed to have more speed.
Learn the difference between cryptocurrencies, DeFi, tokens, fan tokens and NFT here. What is volatility?
Volatility represents the measure of oscillations that occur in a given period. It serves to measure the periodicity and intensity of these variations, in the analyzed period. So this is a concept related to the ups and downs that can occur.
Therefore, an environment in which many changes occur or where they are very frequent is considered more volatile. As you will see, this characteristic tends to increase the risks that are taken when carrying out operations.
To measure volatility, it is common to resort to statistical methods, such as calculating the standard deviation of data. Thus, it also serves as an objective measure of market conditions, allowing comparison between similar investments, for example.
How does volatility work in financial markets?
In addition to understanding the concept of volatility, it is essential to understand how it applies to investments. In this sense, volatility is related to the trading prices of investments and the general behavior of the trading environment.
Consider, for example, the stock exchange. The volatility of a stock can be measured by price fluctuations that occur over time.
Because of this operation, volatility is more associated with variable income. After all, in this class there is no guarantee of return, since performance depends on market conditions. However, certain fixed income investments can also be volatile.
This is the case of prefixed or hybrid securities. In this context, profitability is composed, in part or in full, of a fixed rate. However, income is only guaranteed in the final term. If redemption of the security is anticipated, it will be traded at the market price of the day.
This price is given by mark-to-market, which considers expectations regarding the economy’s interest rate to define the current price of securities. Therefore, until maturity, the investments face relative volatility, as daily prices can suffer large fluctuations.
What risks does volatility bring? Find out here.
Volatility in the world of cryptocurrencies
As you can see, the crypto market has high volatility. Therefore, investing in this type of asset implies having patience and the stomach to take the financial risks involved. That’s because cryptocurrencies vary in prices, with impressive ease.
For example, some digital currencies can go up 10% in one hour and then drop more than twice as much in the next hour. But if it is a more solid product, the oscillation happens at smaller margins. To better illustrate, let’s think regarding Bitcoin, which since it was launched, has gone through ups and downs.
In 2008, this asset was worth pennies. Then, between 2009 and 2011, it increased by 30,000 percent. In December 2017, it reached BRL 64 thousand and in December 2018, it dropped to around BRL 12 thousand. With so many variations, it takes wisdom to face this roller coaster, the good part is that profit can be advantageous.
Why are cryptocurrencies so volatile?
A few factors contribute to high volatility in the crypto world. See some:
While the stock market works only during the trading sessions, the cryptocurrency market does not stop and works 24 hours a day, 7 days a week. This directly impacts the price of digital currencies, as people who invest in this type of asset end up moving assets all the time.
The crypto market is still in an emerging phase, which leads to more speculation, strangeness and distrust. Starting with the fact that people understand that the use of cryptocurrencies is digital and not physical, that is, they only exist on the internet.
The culture of investing is still something new in Brazil and one of the consequences is the concentration of the cryptocurrency market in the hands of a few people. So, most of the negotiations are done by a small group of investors and thus, prices are subject to the movements of these portfolios.
While social media helps, it can also be a hindrance. So much so that it has an impact on currency movements because it is a new market. Several people, especially less experienced investors, get their information only through portals and content creators. Which is not a problem, but does not dispense with deeper studies on the subject and even specialized investment advice.
Many people are dazzled by the market and even more so when it is in a moment of temporary highs, which is when people enter just to seek short-term profit. But when they see that this is not how it works, they leave quickly and affect price fluctuations.
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