Volatility is king. Bitcoin’s violent price swings drew in thousands to the digital asset markets, but it also sends thousands of curious yet skeptical investors running for the hills.
Bitcoin Market Journal has sought to establish which of the most popular digital currencies are prone to excessive volatility, helping investors determine risk and maintain a steady heartbeat during wild price swings.
Analyzing Digital Asset Volatility
The top exchanges used today – such as Binance, Bittrex, and Coinbase – host hundreds of tradable digital assets. Analyzing all of them would prove worthless as many digital currencies and tokens have little to no value accompanied by low trading volume.
BMJ has calculated the average daily volatility for the top 30 cryptocurrencies based on market capitalization. The assets evaluated required at least two years of valid pricing data in order to be included. The price data used for this article stems from CoinMarketCap. .
Assets less than two years old were left off this list as they are too new to establish a baseline of stability. Further, as this list measures volatility, it has been assessed in absolute values. A negative change was treated the same as a positive one; the only metric was the volume of daily change averaged over the relevant period.
Least Volatile Cryptocurrencies
Two-year price variance is the most important factor in our analysis at 35 percent. This is to correct for the distorting effects of short-term variations in favor of long-term trends. It is not, however, the only metric we used because many other structural factors go into both evaluating and predicting stability. Even two-year stability may not reflect the future performance of an asset, even though it is a powerful indicator.
The second most important factor, at 25 percent, was an asset’s stability throughout the past year. The market has experienced its fair share of ups and downs in the past 365 days, so the volatility indicators should be more sound than those of the chaotic crash of 2018.
The last six months price variance provides a short-term bearing for the cryptocurrencies in question. It’s crucial for investors to establish personal risk prior to investing. Identifying short term investments is easier said than done, but knowing the volatility of your potential investments can help rule out assets that either move too little or too much for the short-term.
Most Volatile Cryptocurrencies
Years traded came to another 15 percent of our analysis. As any asset matures, it’s more likely to find its feet in the marketplace. The early days of trading for a new product, including a cryptocurrency, can involve substantial price swings as investors try to find a steady value. The longer a product has been traded, the more likely it becomes that traders have agreed on its value and generated a relatively stable position.
Finally, market capitalization came to 15 percent of our analysis. As with the weight of one-year price variance, this was to help correct for the outsized impacts to which small or short-term markets can be prone. The larger an asset’s market capitalization, the more trading and money it takes to meaningfully change its price. A small and lightly traded asset, on the other hand, has far more potential volatility because even a handful of trades can change pricing.
Volatility is a key metric for any investment, and particularly cryptocurrencies. It’s likely that volatility will remain (relatively) high for the time being as this market continues to find its role both as a consumer product and an investment class.
Traders should pay attention to how often and wildly their investments fluctuate and build their portfolio accordingly.
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- Bitcoin Volatility vs. Bitcoin Stability: How to Minimize Risk
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