You have accumulated some money you want to invest and multiply. Unfortunately, there’s still a little hitch: do you choose stocks or cryptocurrencies? Or is the hybrid approach, where you invest in stocks and cryptocurrency, the best choice for you and your money?
From volatility to diversification, there’s a lot to consider. Understanding how to buy crypto and which currency is best to invest in is familiar to every investor. So before you choose a virtual currency and invest, you need to understand the concept of cryptocurrency volatility.
What is a cryptocurrency, and what is it for?
A digital payment system was created with cryptocurrencies that do not require intermediaries such as central banks, other banks, or governments. This is done to give users more anonymity and independence. In addition, blockchain technology provides a high degree of protection against manipulation. Because blockchain is a series of blocks of data, information is stored about every transaction made so far in this network. Once a cryptocurrency exchange occurs, such as when paying with bitcoins, the amount is transferred from one person to another. This transaction is stored in a block of data in the blockchain. Because of the cryptographic encryption of the transaction, the data can only be changed with incredible difficulty. In addition, a copy of the blockchain is stored by each party participating in the network, known as node. Today, live crypto prices can be viewed on the crypto exchange. But the price is only sometimes kept in one indicator. Many factors influence this indicator.
Cryptocurrencies are digital, purely electronic currencies based on blockchain technology. Blockchain is a digital ledger that allows all transactions on a decentralized network to be verified and validated. The term “crypto” comes from the cryptographic methods used to verify transactions on the network. These methods eliminate the need for a central intermediary such as a bank, which cryptocurrency proponents consider a significant advantage. Instead, all users of the network receive a copy of the blockchain. Therefore, if a user tries to edit or modify the blockchain themselves, other users will reject that version.
Risks of investing in cryptocurrency
Investing in cryptocurrencies is considered very risky. Because without regulation, there can be an increase in crime and instability in the financial market. In addition, cryptocurrencies, such as Bitcoin, are subject to price and technical risks. But above all, the volatility clustering of digital money can lead to significant losses for investors. But if you understand all the intricacies of cryptocurrency pricing, you can avoid losing your money. Now let’s analyze the risks of fiat money in more detail.
- With cryptocurrencies, storage is a risk. Because coins and tokens, that is, digital currency coins, so to speak, are stored in a wallet. This is a digital wallet that stores information about all transactions and the crypto balance of the user. A personal digital key, the so-called private key, protects access to the wallet. On the one hand, this increases security, but it also has a risk. Because if you lose your key, the user can no longer access the cryptocurrencies stored in the wallet, and no one else can. Thus, they are irretrievably lost. For example, if you lose or forget the PIN for your bank account or online banking password, the bank can help you, and your assets will still be available.
- Every cryptocurrency has one thing in common: they are highly volatile. This means that there are extreme price fluctuations daily. This is mainly due to the limited supply of digital currencies. Demand determines the price. Bitcoins, for example, are limited to a maximum of 21 million coins. There is no central bank behind the cryptocurrency correlation, which will buy more bitcoins as demand rises. Into circulation, and when demand falls, removes the coins from the market again to keep the price reasonably stable. The coins in circulation remain there as well. This is true of most cryptocurrencies because the creation or mining of coins and tokens involves a complex computer process. This means that it takes time for more digital cryptocurrency coins to become available. If demand increases by then, the price will rise. If new coins and tokens go into circulation and demand is met, the price will drop again.
In addition to the high risk associated with cryptocurrencies, there are also opportunities. Cryptocurrencies are valid worldwide and can be used for payment anywhere. The online and offline payment options for cryptocurrencies are still minimal. Nevertheless, they have the advantage that owners can avoid the costly exchange of two currencies. In addition, blockchain technology, on which most cryptocurrencies are based, has a high degree of protection against manipulation. However, it cannot protect against market manipulation by cryptocurrencies or large companies.
What is volatility?
Volatility is a fundamental concept in finance and refers to the fluctuation of assets or financial instruments over some time. It is a measure of risk and can present both opportunities and challenges for investors. It plays a significant role in the cryptocurrency space. This is because Bitcoin and other crypto assets are generally considered highly volatile, so they are often also classified as risk assets.
Finance describes different types of volatility transmission:
- Historical V. Historical Vol. measures the past volatility of an asset or financial instrument. It is often calculated as the standard deviation of daily returns over some time.
- Implied vol. measures the expected fluctuations of an asset or financial instrument in the future. It is often derived from the prices of options, reflecting market expectations about future fluctuations.
- Relative vola. It is the ratio of the volatility of an asset or financial instrument to the volatility of a comparative index or benchmark. It provides information on how risky an asset is compared to others.
Anyone deciding to invest in cryptocurrency should carefully and thoroughly examine the opportunities, risks, technology, and ideas behind cryptocurrency. While digital currencies are an increasingly popular investment, they are also highly speculative and risky. Strong price fluctuations ensure that high speculative profits are possible in a short period, but so are huge losses. As a small part of a diversified portfolio, cryptocurrencies can. However, they help spread the risk transmission in cryptocurrencies even wider and increase the chances of attractive profits.
