In the world of cryptocurrency, volatility is a big deal. Volatility is a measure of the amount of movement within a currency. It’s important to understand that this doesn’t refer to the price of an asset. In the crypto world, volatility is used to describe how much the price of a cryptocurrency changes over time.
It’s what determines how much your investment will increase or decrease in the crypto market. If you have low volatility, you are likely to have a pretty stable investment. But if you have high volatility, it could go either way: you could see your investment skyrocket, or it might crash and burn completely.
In this article, you will get insights into low and high volatility and factors that make cryptocurrency volatile.
How is volatility measured in the crypto world?
It is measured by standard deviation, which is a statistical measure that describes how much data varies from the average. A positive standard deviation means that an asset tends to move farther away from its average value over time.
In other words, an asset with a positive standard deviation is more volatile than one with a negative standard deviation.
The higher the standard deviation of an asset’s price movements, the greater its volatility. If an asset has high volatility, this means its price will fluctuate more widely from day to day or week to week than if it had low volatility.
Volatility can be good for traders who want to make money on short-term investments, but it can also make it difficult for businesses to decide when to buy or sell their coins or tokens. This can lead to losses if companies try to time the market incorrectly or if they don’t have enough capital available when prices start falling unexpectedly fast due to external factors.
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High and Low Volatility
There are two types of volatility: high and low. When you hear about high or low volatility in the crypto world, it means how much a cryptocurrency’s value fluctuates over time. This can be caused by many factors, including market demand and supply issues with cryptocurrencies’ underlying technology infrastructure such as exchanges.
The term high volatility refers to when a cryptocurrency’s value rises or falls dramatically in a very short period of time like up or down by 5%. High volatility means that there are big swings in a coin’s price over short periods of time and the currency has changed in value a lot since its inception.
In the context of cryptocurrencies, high volatility means that it has significantly increased or decreased in price since its inception.
Low volatility refers to when one cryptocurrency’s value rises or falls slowly over time like up or down by 1% or 2%. It means that there are small swings in a coin’s value and the currency has not changed in value very much over a set period of time.
In the context of cryptocurrencies, low volatility means that it hasn’t significantly changed in price since its inception.
5 Factors that make a cryptocurrency volatile
1. Number of people who hold the coin
The more people that hold a coin, the less likely it is to fluctuate in price. This is because when many people buy or sell at once, they have to compete with each other, which tends to keep prices stable. So if more people are buying than selling, then the price will go up and if more people are selling than buying, then the price will go down.
2. Beliefs about its future value
The second factor that affects price volatility is whether or not you believe that your coin will increase in value over time. If you are confident that your coin will increase in value over time or even just maintain its current value, then you will be less likely to sell it now for less money than you think it will be worth later on and this confidence helps stabilize prices by reducing volatility.
3. Regulatory changes
if there is a new regulation on how cryptocurrencies are traded or used, this can have an effect on demand and supply. For example, if a country decides they don’t like bitcoin anymore and bans it altogether, then this could cause many people who own bitcoin in that country to sell it at once because they cannot use it anymore. This would make for a huge drop in price as well as an increase in volatility.
4. Speculations by investors
The other major factor driving volatility is speculation by investors who buy and sell cryptocurrencies based on what they think others will do with them rather than on their own fundamental value as an investment vehicle. In other words, people are buying cryptocurrencies because they think somebody else will buy them later at a higher price.
This creates bubbles that pop when demand falls outstrips supply or expectations change suddenly due to external factors. These include government regulation and taxation policies for crypto currencies, geopolitical events such as wars or natural disasters, new technological innovations like quantum computing, changes in global interest rates, and more.
5. Announcements about upcoming changes
If there is any sort of announcement about upcoming regulations or changes in how cryptocurrencies are used or traded, it can cause people to panic and buy or sell based on what they think will happen next rather than what actually happens next, which might not even be true.
For example, there have been times when just one news story about a major exchange hack or government crackdown on cryptocurrencies has sent prices plummeting overnight. These events can be devastating for investors who are not prepared for such drastic changes in value.
The Bottom-line
If you are new to the world of cryptocurrency, the simplest way to define volatility is that it refers to how much the price of an asset fluctuates.
In the crypto world, investors are less likely to invest because they don’t want their investments to fluctuate so much. This means that higher-volatility cryptocurrencies are less likely to attract investment than lower-volatility ones.