Although cryptocurrencies have a promising future, one of the biggest hurdle it has to overcome is the current volatility. Understanding some reasons as to why cryptocurrencies are much more volatile than other assets in the market can help investors better cope with expectations and make sound investment strategies.
Frank Holmes, the CEO of U.S. Global Investors does just that in this short video.
This past year has seen an incredible rally in the crypto world. Huge abundance of people is following and tracking it. With bitcoin becoming a commodity, a future’s market instrument we saw the price of bitcoin peaking.
And this year, 2018, there has been nothing but lots of negative news and news of regulation coming in, and then there was the introduction of taxes on cryptos. Now it appears that the prices have bottomed out. There were some big pickups and rallies.
One of the most significant development was that CFA society is now to include cryptocurrency as part of the curriculum. Additionally, the federal reserve has created its own crypto index. So with all the negative narrative, there is something very positive, something like an undercurrent, that lends itself that this is a really important space and it’s only got more upside than it has a downside.
What investors really have to be sensitive of short-term is the DNA of volatility. When we look at gold, the DNA of volatility says that 70% of the time, which is one standard deviation, gold and the S&P 500 go up or down 1%. It’s a non-event. When they go 2% or 4%up or down, then it starts to become significant.
However, cryptocurrency world is much different. They have a daily volatility of 5-7%. The significantly higher volatility has a rational reason for it. Whenever you cap the number of coins that are supplied to the marketplace, then naturally, you’ll have more volatility.
Holmes concludes the video by saying, “So stay tuned for something big happening in the crypto space, in the blockchain world. It is early investing. It’s very speculative but it has lots of opportunity for tremendous upside.”