Volatility in trading is a typical scenario with both positive and negative outcomes. But is volatility always bad? This article by Sathvik Vishwanath would help us understand the advantages and disadvantages of bitcoin volatility.
When you hear the word bitcoin or crypto product, the first thing that comes to mind is the stormy price movements. This volatility of Bitcoin through price makes many think it is not a reliable source of exchange. Most of the businesses and nation-states still are hesitant to utilize them mainly because of the volatility of Bitcoin and its uncontrollable nature. Is price volatility always a negative phenomenon? Not. Let's do a bitcoin volatility analysis and figure out the advantages and disadvantages of the price volatility in crypto products.
The causative factors of volatility
The volatility of the bitcoin market and crypto products is caused due to several reasons. The first thing is the relatively new methodology of crypto products. The consumers' attitude towards it determines the demand of any entity. Many behavioural economists consider this an essential reason for the bitcoin volatility that is relatively determined by the current events in the economy. When Tesla CEO Elon Musk announced that his company would no longer allow bitcoin to be a method of exchange, there was a sudden fall in the prices of crypto products by 20 per cent. Similarly, whenever there is a news article stating the premature regulation of the nation-states on crypto products, the same thing happens.
The limited availability of crypto products also makes it an entity similar to gold. There are only 21 million crypto products that can be mined, making for the volatility of the prices. The utility of crypto products is another factor that also determines volatility. Finally, the bitcoin whales have a significant impact as they manipulate the market, increase stipulation or distort it to serve their needs.
Advantages of bitcoin volatility
One must understand for any economic entity to be good, when the currency or shares value is determined in a free market, they undergo many changes. This is not something very unique to crypto products alone. The riskier the assets are, the more the returns. The volatility of bitcoin, like other crypto products, has the potential for greater investment returns. When crypto products were released in 2008, its 10,000 bitcoins were equivalent to 2 pepperoni pizzas, but as of 28th Feb 2022, the value of one bitcoin is INR 28,82,501.92.
Limited availability means more appreciation
While the central bank regulates traditional fiat currencies, they tend to print more money whenever there is volatility or inflation, which reduces the demand for cash. The limitation in the number makes bitcoin a valuable entity. If the purchase is done during market distortion time and is held for long, there will likely be much profit once it is sold.
Not just for the individual also for the country
Not just long-term selling, but even the short-term selling of crypto products makes it more advantageous for several investors. The governments should stop seeing crypto products as an enemy of economic integrity. But look at its potential for emancipating trade due to the reach of the crypto products. Especially for developing nations like India, we don't have to depend upon US dollars for international trade. Since bitcoin is decentralized, it also creates an egalitarian approach towards world trade.
Disadvantages of bitcoin volatility
The volatility of Bitcoin can 'make or break'. Sometimes the higher-risk transactions can affect the trader. Especially for a short-term crypto trader, it isn't easy to track the prices and keep a tab of its constant products. Bitcoin volatility analysis showcases that excessive dependence on crypto products can even be detrimental to the nation's economy if they are not regulated in the proper sense.
Anonymity combined with volatility
The anonymity, along with the volatility of the bitcoin market, makes it more comfortable for illegal transactions and money laundering. The bitcoin volatility problem also reduces the diversification of the investments made in crypto products. The smaller economies are affected by the developed countries' policy changes alone and by the bitcoin whales. Whenever the bitcoin whales manipulate the prices of the crypto products, it impacts the global economy, which is a significant bitcoin volatility problem. This big fish small fish approach makes the vulnerable suffer further.
Awareness is the key
Every asset has its flip side, volatility of the US dollar last year alone was around 90 per cent, and S&P shares were about 50 per cent. There is also volatility in physical assets like gold and petroleum products. It is not something unique to crypto products alone. Many negative impacts can be eradicated with a positive attitude towards the crypto market and awareness creation. Regulation of market distortion is a crucial step in this sector. This can happen only with combined global efforts.
From the investor side, proper methodologies and risk averting techniques through expert dealers can reduce the risks and make the volatility an advantage. Readers can diversify their portfolios with Unocoin's crypto basket to hedge the market's volatility. Another remarkable feature to face market volatility is to use Unocoin's SBP or Systematic Buying Plan. It is not just about the nature of the asset, but the approach we have towards it matters much. If someone wants to invest in crypto products for a better return, they must not do it blindly but understand its nature or better do it through trusted experts.
Bitcoin is a relatively new form of exchange, so once we understand its abilities and shortcomings and if the governments provide proper regulations, it is possible that it can be less volatile. The bitcoin market majorly shows volatility with the hours that correspond to the timings of the European and the American market.
Disclaimer: Crypto products are unregulated as of this date in India. They could be highly volatile. I understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).