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​​Cryptocurrency Volatility Strikes Back

Cryptocurrency Sep 08, 2021 11:02AM ET
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​​Cryptocurrency Volatility Strikes Back
 
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  • Volatility is an alluring cryptocurrency investment trademark.
  • Higher volatility adds additional crypto criticism to fuel the negative market sentiment.
  • Social media has a powerful impact on Bitcoin’s price swings.

Since July 20th, crypto’s market capitalization has increased by more than 100%, rallying from $1.2 trillion to $2.35 trillion on September 6th, without any cooling-off periods. On May 13th, following a neutralizing setback from Chinese regulators, Bitcoin fell by more than 50% to a low of $29,000 as the market sought to regain momentum. Yet, Bitcoin’s volatility is not always triggered by negative news.

Positive News with Negative Effects

Crypto markets are defined in the financial space as highly volatile assets, and that was attributed to lack of liquidity. Research done by Nikolaos A. Kyriazis illustrates that “behavior in cryptocurrencies cannot be rationally described” because people invest based on opinion, making the entire market uncertain.

Data from the research on How Social Media Impacts Bitcoin Value suggests that there is a complex relationship between social media sentiment and future Bitcoin price swings. As the authors argue, social media helps disseminate information creating a resourceful medium through which investors can leverage their decision.

2021 has numerous examples where social media made investors make harsh decisions like when Elon Musk renounced Bitcoin or when El Salvador made Bitcoin a legal tender. However, what’s certain is that good and bad news affects cryptocurrencies equally, and news that broke out on September 7th was a “cool-off” period for investors to take profits.

While the most recent price plunge is attributed to a healthy correction,Twitter (NYSE:TWTR) user and trader IncomeSharks, augments Bitcoin’s social media price dependency. Moreso, while Bitcoin’s sentiment was positive as El Salvador purchased Bitcoin, the unusual downturn is associated with a “Sell the News” trading strategy.

The Downfalls of Every Correction

Market corrections are normal. Analysts suggest that intermediate corrections during a bull run are healthy because they remove the froth. Lex Moskovski, CIO at Moskovski Capital, emphasized that “a healthy correction” is needed for the price to go higher, and his views have been echoed by other analysts when pullbacks occurred during a price stint. Still, retail investors cannot make sense of price sheds, as their quick-profit beliefs are dropped.

While volatility is a healthy repercussion of market strain, the issue grows deeper as counterarguments against cryptocurrencies intensify the negative sentiment. Moreover, its excessive volatility creates a new financial paradigm where Bitcoin is not a medium of exchange but rather a store of value. As a result, investors and financial analysts can have a foundation on which to discredit Bitcoin.

Crypto’s volatility operates as a double-edged sword. According to Don Guo, CEO of Broctagon Fintech Group, the lack of liquidity is the crypto market’s biggest drawback because it adds an extra risk layer for the consumer-merchant dynamic.

On The Flipside

  • Crypto regulation and country acceptance can increase governmental corruption as it increases transaction anonymity.
  • Cryptocurrency users will seek alternatives if Bitcoin is transformed into a governmental financial tool.

Furthermore, Jake Klein told CNBC that Bitcoin still has a long way to go until it can manifest transcendence into our daily financial interactions and “security.” What’s more, he believes that Bitcoin’s volatility factor will be the main determinant for investors to return to gold. In truth, Bitcoin’s 2021 realized volatility reached 86%, while gold’s volatility only passed 16%.

In addition, more volatility adds additional financial incentives for investors. Peter Schiff had argued that gold is a better store of value than Bitcoin and has nothing in common with Bitcoin. While gold has a 2,500-year head start and Bitcoin has gained more market acceptance in the past five years, the counterarguments don’t hold bearing because new financial behaviors are not fully immersed into financial thinking.

Why You Should Care?

The cryptocurrency market is atypical because of its unregulated nature, its chaotic behavior, and difficulty to predict. However, when the industry is highly regulated and has more liquidity, the financial gains will be similar to those of the current financial market. However, investing in any financial market has similar risks regardless of being regulated or unregulated.

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​​Cryptocurrency Volatility Strikes Back
 

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