Here’s why volatiity is a necessary evil for cryptocurrency
One of cryptocurrency’s biggest attributes is its high level of volatility. It’s fluctuating prices have pushed governments to warn investors to practice caution and some governments have even made crypto-trading illegal. In this climate, it’s easy to view the volatility of cryptocurrency in a bad light. In fact, many crypto-startups are pursuing stabilisation by creating stable coins. After all, high volatility is one of the key factors which keep cryptocurrency from becoming part of the mainstream. However, is volatility necessarily bad? Or could it be a necessary evil?
Volatility of cryptocurrency caught the mainstream’s attention
Bitcoin has been around for over a decade but it was only widely discussed in recent years. From November to December 2017, investors had flooded into the crypto market, driving the prices up to $11 000 during that period.
Since then everyone — top businessmen, leaders of the banking and financial world, and Wall Street — all had something to say about Bitcoin and cryptocurrencies. Although many of them gave cryptocurrencies a bad name, it was during this period that interest in cryptocurrency grew like never before. In fact, people were so interested, the Chicago Board Options Exchange (CBOE), and Chicago Mercantile Exchange (CME) started Bitcoin futures trading in December 2018.
Volatility might sound scary but it’s not new
Businessmen, banks, governments and financial institutions may warn others about the high volatility of cryptocurrency but it’s also important to keep in mind that volatility is not a new phenomenon. Assets, stocks, bonds and forex are all prone to high fluctuations in prices and experienced investors know how to handle the markets’ volatility. In the stock market, there are long term and short term investments. Those who are in it for the long term are not affected by day-to-day changes in the market. They are not put off by the higher level of volatility in the stock market in comparison to other assets, say, government bonds or gold. Experienced investors understand the importance of buying investments on a fixed schedule — this strategy can similarly be applied to investing in cryptocurrency.
No doubt, cryptocurrency is a high-risk investment and are even more volatile than the stock market. However, volatile markets tend to generate greater opportunities to earn higher returns as there are bigger price movements. With lesser volatility, price movements are low and therefore, resulting in a lower chance of earning great returns. There’s no denying that one of the biggest draws to cryptocurrency investments is indeed its high level of volatility.
Stabilisation may not be as good as you think
Stable coins are a big thing in the crypto-community. However, creating stable coins can be complex and perhaps even problematic. Each stable coin project goes about creating stability in different ways. Some stable coins are pegged to USD, while others are pegged to real-world assets like gold. While different stable coins vary in terms of the mechanism maintaining their stability, most of them have the same goal in mind: targeting and setting a specific price for a coin.
The problem with this is that whenever demand for the stable coin increases or decreases, it puts pressure on the stabilisation mechanism of the token. And when that happens, an organisation will be tasked to maintain the price and the stability of the coin. Pegged currencies aren’t new and historically, many pegged fiat currencies have been broken. When currencies are pegged, there is always pressure coming from those who are trying to maintain the price and those who are trying to break it. When stabilisation is forced upon cryptocurrency, new problems may arise.
In many ways, volatility is a double-edged sword for cryptocurrency. It drew in the attention of the mainstream and got institutional investors talking. Additionally, cryptocurrency’s volatility is what allows investors to reap high returns in a short period of time. That being said, frequent price fluctuations prevent it from becoming a mode of transaction in the mainstream, making it more of an asset for trade and investment.