For the purposes of crypto, liquidity most often refers to financial liquidity and market liquidity. From https://www.xcritical.com/ governments to Wall Street Banks, and even startups, many are looking to stable coins as the answer, but many are shrouded in controversy. The original cryptocurrency skyrocketed in value over a very few years to be worth of $20,000 offering many thousands of percent gains for those who invested early. The stories of early adopters and miners, who held a bucketload of Bitcoin when they were worth pennies reaching millionaire status certainly caught the imagination of the planet.

Disentangling the effects at the individual level

Volatility Digital asset indicators are handy for identifying the beginning of a new trend after a period of price stability. Conversely, when the price remains within the range, the ATR hovers close to the 0 level. It’s essential to keep in mind that while this approach can be effective in a ranging market, it may not perform well in a bear market.

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Many of the most highly capitalized cryptocurrencies at the time of this analysis began trading after 2020, making the sample representative of the current state of the market. Specifically, Jha and Baur (2020); Ftiti et al. (2021) explores the analysis of cryptocurrency volatility by using intraday data of a small number of coins and tokens. Similarly, Naeem et al. (2022); Yousaf and Ali (2020) study spillover effect on the volatility using generalized vector autoregressive model versions. The second strand of literature explores how these studies analyze equity volatility patterns by computing high-frequency volatility estimators such as the realized variance (Andersen et al. 2001) and the bipower variation Barndorff-Nielsen and Shephard (2006). Alternative volatility estimators like crypto volatility trading realized semivariance (Barndorff-Nielsen et al. 2008) dissect the realized variance measure, isolating the elements attributable solely to positive and negative high-frequency returns.

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All investments involve the risk of loss and the past performance of a security or a financial product does not guarantee future results or returns. When Beijing banned crypto outright in September 2021, crypto prices fell hard and fast. The downside didn’t last, but international exchanges scrambled to drop Chinese users now that a legal gap had been patched. Furthermore, when prices are highly volatile, they are less likely to move within a range, which means more opportunities for trending positions—whether it’s an upward or downward trend, rather than trading sideways. In the world of trading, volatility isn’t just a random term; it’s a category of indicators that serve to measure the price’s fluctuation within a specific time frame. While traditional trading often involves smaller degrees of volatility that might not be immediately evident on a price chart, these fluctuations can greatly impact your investments.

The crypto market is still an infant asset class; relatively underdeveloped, immature, and highly volatile. This volatility is a feature and a right of passage, rather than a bug, of crypto’s high growth phase, presenting both challenges and opportunities for traders and investors alike. Many of the reasons for price volatility in mainstream markets are reflected in crypto markets as well. Speculation and news events such as COVID-19 drive price swings in crypto and mainstream markets similarly. However, the effects of these events are often exaggerated in crypto due to the unique features which characterise the immature nature of the digital asset space.

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Fears of regulation negatively impacting cryptocurrency are one of the many reasons why cryptocurrencies are so volatile. However, many cryptocurrencies experience their own volatility, like when Litecoin fell following the publication of a fake press release stating Walmart would be accepting payment with LTC. The Average True Range (ATR) is calculated by comparing the current price range with its past range, typically consisting of a high and a low over a specific period of time. When the price moves beyond its recent range, the ATR value increases, indicating higher volatility. The Average True Range (ATR) is a volatility indicator depicted as a line at the bottom of the chart. When it starts to rise, it indicates increased market volatility, while low volatility keeps it closer to the 0 level.

With no training wheels or guard rails in place, crypto’s free market dynamics are susceptible to high volatility. Come August 2024, US courts ordered Ripple to pay a $125 million fine, significantly lower than the SEC’s initial $2 billion demand. This suit will likely inform future case law and precedent, which will shape regulations alongside those of each individual government into force, which you can monitor via this digital assets regulatory policy tracker.

This behavior underscores a herding effect in investment decisions, influenced by a collective eagerness to participate in perceived lucrative opportunities without fully grasping the market’s complexities. When separately estimating the selected model specification over the three years that compose our dataset, we find that the bearish period in 2022 is the one that is actually driving the inversion of the leverage effect more than the two previous years. Even though the level of on-chain activityFootnote 6 is still a fraction of the volume of off-chain trades that happens on centralized exchanges, it is in the process of growing and represents an element of novelty compared to traditional finance. Our analysis focuses on off-chain data for comparison with the equity market, but substantial activity on a decentralized platform makes the market less reactive and fractionated (Aspris et al. 2021). Table 3 presents the results for the reference specification of the panel HAR and its variant where the first lag of the volatility is decomposed into its signed components. This Section provides the different results of our empirical analysis where we comment on the estimation results of various model specifications described in .

In the high volatile market, the line on the graph appears to be very jagged and unstable, with frequent ups and downs that are often quite significant. This indicates that the market is experiencing a lot of fluctuations and uncertainty, and that investors are likely to see a lot of risk and potential reward. On the other hand, the low volatile market appears much more stable and predictable, with a smoother line that shows little variation over time.

In our work, we adopt the realized volatility as an estimator for historical volatility, which employs intraday data. Unlike the volatility calculated daily, realized volatility allows us to capture the past volatility dynamics more accurately and can account for sudden changes in market conditions. Being calculated on a larger amount of data points, it is also less sensitive to outliers and price gaps, and it is also not affected by assumptions on the market as the implied volatility.

Therefore, it could be that the information is not fully reflected by the price of coins and tokens on centralized exchanges, as there are two alternative and interoperable layers of activities. Moreover, the autoregressive models we employed in our empirical study are all linear in the parameters, neglecting any possible nonlinear relationship in the volatility pattern. This aspect can be further analyzed by extending the model specifications to regime-switching models or employing machine learning techniques that account for nonlinearities as discussed in Sebastião and Godinho (2021). We reserve these points as a study for further analysis since we believe it is possible to deepen the understanding of the cryptocurrency volatility following those lines.

A trailing stop is a type of stop order set at a different percentage or price than the security’s current market price. A trailing stop set at a lower price keeps a trader’s position open for longer, while a higher price keeps it at a short position. Though day trading works best for volatile exchanges, there are times you won’t be able to monitor your trades. In the stock market, a new CEO or board of directors can impact a company’s shares. While traditional management roles don’t apply to a decentralized blockchain, cryptocurrencies do have founders and developers.

• Depending on where you find yourself in the cryptocurrency space, that word can mean a lot of joy or heartbreak.
• King and Koutmos (2021) elaborates on the effect of herding behavior on the trading activity for cryptocurrencies.
• By monitoring historical, implied, and realised volatility, investors can gain a better understanding of how the crypto market is likely to behave in the future and adjust their strategies accordingly.
• The asset class, the market, and its investors/speculators are still finding their feet during this early and high growth phase.

Trade flow imbalances appear effective in explaining price changes in cryptocurrencies. The reversed asymmetric effect of high-frequency cryptocurrency returns indicates that investors exploit market crashes as a buying opportunity to enter at a discount. Such behavior connects to FoMo as a motivator for investment behavior in the cryptocurrency market. Gerrans et al. (2023) retrieves a larger association between FoMO and crypto ownership than equity ownership for young age groups more likely to trade crypto assets. The concept of FoMo among retail investors has been explored by Argan et al. (2023) to observe the relationship with investment engagement and by Park et al. (2023) to analyze the relationship with market stability. King and Koutmos (2021) elaborates on the effect of herding behavior on the trading activity for cryptocurrencies.

Unusual spikes in volume often correlate with more volatile price dynamics as more people rush to buy or sell a cryptocurrency. Measuring volatility isn’t an exact science, but traders typically use the historical price trends and average percentage fluctuations to get a feel for a cryptocurrency’s risk profile. After studying the standard price deviations, traders compare and contrast these percentages to see which cryptocurrencies have the highest volatility. This chart lets you compare the 1D volatility of each cryptocurrency over a period of time. It’s important to note that while volatility may pose challenges, it is an inherent characteristic of emerging and disruptive markets. Realised volatility is a measure of how much a cryptocurrency’s price has actually fluctuated over a given period of time.