Interesting argument regarding thin order books. Havent thought about this before.
In my opinion the biggest reason is the lack of experience of " investors" most of them buy and sell without clear strategies and are quick to spread the panic and fud.
Topic: [2018-02-27] Why Is the Cryptocurrency Market So Volatile: Expert Take (Read 140 times)
February 27, 2018, 05:16:10 PM
February 27, 2018, 11:42:12 AM
Cryptocurrencies' market are volatile because it is not regulated. Hence, its value is heavily dependent on the supply and demand which greatly changes day by day. Come to think of it, if fiat currencies are not regulated, and its value heavily depends on supply and demand, then there would also be extreme market fluctuations because by then, whales can just control it by buying and selling a HEFTY amount any minute of everyday. Government's regulation through central banks are responsible for the stability features of currencies because they regulate the inflow and outflow of paper money. In this situation, there is control in the amount of money being used by the general public. So there lies the difference, if I may add.
February 27, 2018, 11:13:00 AM
I disagree with the notion that cryptocurrencies don’t "employ thousands of people". What about thousands of traders and thousands of people making money on crypto-related jobs, like the author of the article, Arthur Iinuma, himself? Then he writes that cryptos generally don’t return dividends and I disagree with that too. I know many people have lost a lot while investing in cryptos, but to state that it is generally the case is an exaggeration imo. Also I think that market manipulation is possible not only in the crypto world but in other places, which are in author's words "at least protected against bad actors", too. Remember what George Soros did when he short-saled 10 billion USD worth of Pound sterling making him a profit of $1 billion afterwards. Wasn't that a market manipulation? ... But I like the optimistic ending of the article though. )
February 27, 2018, 10:27:28 AM
The author of the piece is poking the bush, hoping that he would stab the rat. Bitcoin is based on Supply and Demand and
currently some early adopters and Wall Street whales have bought most of the coins. These people have the power to
manipulate the markets and also the price. The only way to solve this, is to get a more even distribution of bitcoins amongst
more people, to take away that power. This might happen in the future, but my guess is that it would get worst. Once Bitcoin
ETF's are approved, more institutional capital will flow in and smaller investors will be tempted to sell at a much higher price.
currently some early adopters and Wall Street whales have bought most of the coins. These people have the power to
manipulate the markets and also the price. The only way to solve this, is to get a more even distribution of bitcoins amongst
more people, to take away that power. This might happen in the future, but my guess is that it would get worst. Once Bitcoin
ETF's are approved, more institutional capital will flow in and smaller investors will be tempted to sell at a much higher price.
February 27, 2018, 10:03:24 AM
Why Is the Cryptocurrency Market So Volatile: Expert Take
Last year was the least volatile in stock market history of decades. Traders who historically have profited off of pricing swings have given their jobs to high-frequency trading algorithms run by computers that act on the millisecond. On Wall Street, humans are a commodity being replaced by machines, and yet four years of volatility in the stock market can be covered in a month of pricing movements in the cryptocurrency markets.
Veteran cryptocurrency investors know this to be a fact, but exactly why is this asset class more volatile than any other liquid asset in the market?
1. No intrinsic value
Despite company sized valuations, cryptocurrencies don’t sell a product, earn revenue or employ thousands of people. They generally don’t return dividends, and just a tiny amount of the total value of the currency goes into evolving it. Because of this, it is hard to value. How do we know if it is overbought or oversold? When is it a good value or overpriced? Without any fundamentals to base this information off of, we can only rely on market sentiment, often dictated by the media that makes money on viewership.
2. Lack of regulatory oversight
Cryptocurrency is a worldwide phenomenon, and while governments are clamping down on the industry, regulation is still in its early days. Such limited regulation allows for market manipulation which, in turn, introduces volatility, and discourages institutional investment, since a large fund has no assurances that their capital is truly secure or at least protected against such bad actors.
3. Lack of institutional capital
While it is undeniable that some pretty impressive venture capital companies, hedge funds and high net-worth individuals are both fans of and investors in crypto, as a segment, most of the institutional capital is still on the sidelines. As of this writing, we have limited momentum on a crypto ETF or mutual fund. Most banking heads admit that there’s some validity in the space, but have yet to commit significant capital or participation publicly. Institutional capital comes in a variety of forms, such as a large trading desk that has the potential to introduce efficiency and soften market volatility, or a mutual fund buying on behalf of their investors for the long term.
4. Thin order books
Crypto investors are taught to never keep coins on an exchange, which can be hacked. As a result, most of the tradable supply is not on an exchange order book but in off-exchange wallets. In contrast, nearly all of the tradable stock of a publicly listed company is transacted on a single exchange. A large market order can eat into an exchanges order book on the way up or down, causing something called “slippage.” We saw an exaggerated example of this in GDAX Ether flash crash, but less extreme versions of this occur on a daily basis. Because of the capacity for large traders to move the market in either direction and employ tactics to encourage this, volatility goes up.
5. Long term vs. short term
If you invest into something that you don’t expect to take out until you’re 60 years old, then you are probably less concerned about it’s daily or even yearly price movements, thus you’re less likely to trade it. Cryptocurrencies, for the most part, can’t be bought in retirement accounts, and are generally inaccessible to retail brokers and financial advisors, so an entire ecosystem of investors is left out. This leaves us with early adopters that are comfortable with the technology hurdle of dealing with wallets, and web-based trading platforms, the same ones that are refreshing Blockfolio every 10 minutes, high-fiving each other when the coins moon, or sweating in a panic when the price drops. These are the same kind of people who don’t have the discipline to just buy and hold for the long run, and therefore contribute to the panic sells or FOMO buys.
6. Herd mentality
Crypto is largely a phenomenon of millennials, who distrust government, are early adopters in tech, and have been mainly shunned out of investment wins earned in the last decade of rising real estate and stock market prices. But most millennials do not have the long-term investment experience of their more mature generational counterparts. They also tend to have less disposable income as a result of historically poor job economics, and less time in the workforce. This combination of factors results in a few things; an appetite for risk in the hopes of landing a windfall of cash and utilizing a larger share of whatever capital they have to invest in risky instruments, including purchasing such investments on credit. When the market goes down, this is money that they literally cannot afford to lose, so will dump at the first sign of trouble. Since this is a reactionary behavior, they will generally lose money before getting out of the market. When the market starts surging up, they will buy with the money they don’t have. As a group, this appears to be coordinated en masse, but it is just the motivations of many single entities that propagate into a herd mentality. If you pair this behavior with the swings caused by large ‘whales’ in a thinly traded market, you have a synergistic effect.
When will volatility decrease
Over time, we can expect more regulation, a greater diversity of investors, and a more mature outlook on the crypto market. We can also expect higher utility value as merchants find more accessible ways of accepting cryptocurrency, and the technology behind transactions also improves. While volatility may decrease, we can also expect a gradual but steady surge in the value of the cryptocurrency market as a whole. Just as the stock market has given way to long-term holders, so too will the cryptocurrency markets. At the very least, it appears to be something that is going to be here for the long run.
Source: https://cointelegraph.com/news/why-is-the-cryptocurrency-market-so-volatile-expert-take
Last year was the least volatile in stock market history of decades. Traders who historically have profited off of pricing swings have given their jobs to high-frequency trading algorithms run by computers that act on the millisecond. On Wall Street, humans are a commodity being replaced by machines, and yet four years of volatility in the stock market can be covered in a month of pricing movements in the cryptocurrency markets.
Veteran cryptocurrency investors know this to be a fact, but exactly why is this asset class more volatile than any other liquid asset in the market?
1. No intrinsic value
Despite company sized valuations, cryptocurrencies don’t sell a product, earn revenue or employ thousands of people. They generally don’t return dividends, and just a tiny amount of the total value of the currency goes into evolving it. Because of this, it is hard to value. How do we know if it is overbought or oversold? When is it a good value or overpriced? Without any fundamentals to base this information off of, we can only rely on market sentiment, often dictated by the media that makes money on viewership.
2. Lack of regulatory oversight
Cryptocurrency is a worldwide phenomenon, and while governments are clamping down on the industry, regulation is still in its early days. Such limited regulation allows for market manipulation which, in turn, introduces volatility, and discourages institutional investment, since a large fund has no assurances that their capital is truly secure or at least protected against such bad actors.
3. Lack of institutional capital
While it is undeniable that some pretty impressive venture capital companies, hedge funds and high net-worth individuals are both fans of and investors in crypto, as a segment, most of the institutional capital is still on the sidelines. As of this writing, we have limited momentum on a crypto ETF or mutual fund. Most banking heads admit that there’s some validity in the space, but have yet to commit significant capital or participation publicly. Institutional capital comes in a variety of forms, such as a large trading desk that has the potential to introduce efficiency and soften market volatility, or a mutual fund buying on behalf of their investors for the long term.
4. Thin order books
Crypto investors are taught to never keep coins on an exchange, which can be hacked. As a result, most of the tradable supply is not on an exchange order book but in off-exchange wallets. In contrast, nearly all of the tradable stock of a publicly listed company is transacted on a single exchange. A large market order can eat into an exchanges order book on the way up or down, causing something called “slippage.” We saw an exaggerated example of this in GDAX Ether flash crash, but less extreme versions of this occur on a daily basis. Because of the capacity for large traders to move the market in either direction and employ tactics to encourage this, volatility goes up.
5. Long term vs. short term
If you invest into something that you don’t expect to take out until you’re 60 years old, then you are probably less concerned about it’s daily or even yearly price movements, thus you’re less likely to trade it. Cryptocurrencies, for the most part, can’t be bought in retirement accounts, and are generally inaccessible to retail brokers and financial advisors, so an entire ecosystem of investors is left out. This leaves us with early adopters that are comfortable with the technology hurdle of dealing with wallets, and web-based trading platforms, the same ones that are refreshing Blockfolio every 10 minutes, high-fiving each other when the coins moon, or sweating in a panic when the price drops. These are the same kind of people who don’t have the discipline to just buy and hold for the long run, and therefore contribute to the panic sells or FOMO buys.
6. Herd mentality
Crypto is largely a phenomenon of millennials, who distrust government, are early adopters in tech, and have been mainly shunned out of investment wins earned in the last decade of rising real estate and stock market prices. But most millennials do not have the long-term investment experience of their more mature generational counterparts. They also tend to have less disposable income as a result of historically poor job economics, and less time in the workforce. This combination of factors results in a few things; an appetite for risk in the hopes of landing a windfall of cash and utilizing a larger share of whatever capital they have to invest in risky instruments, including purchasing such investments on credit. When the market goes down, this is money that they literally cannot afford to lose, so will dump at the first sign of trouble. Since this is a reactionary behavior, they will generally lose money before getting out of the market. When the market starts surging up, they will buy with the money they don’t have. As a group, this appears to be coordinated en masse, but it is just the motivations of many single entities that propagate into a herd mentality. If you pair this behavior with the swings caused by large ‘whales’ in a thinly traded market, you have a synergistic effect.
When will volatility decrease
Over time, we can expect more regulation, a greater diversity of investors, and a more mature outlook on the crypto market. We can also expect higher utility value as merchants find more accessible ways of accepting cryptocurrency, and the technology behind transactions also improves. While volatility may decrease, we can also expect a gradual but steady surge in the value of the cryptocurrency market as a whole. Just as the stock market has given way to long-term holders, so too will the cryptocurrency markets. At the very least, it appears to be something that is going to be here for the long run.
Source: https://cointelegraph.com/news/why-is-the-cryptocurrency-market-so-volatile-expert-take
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