Analysing the nature of volatility in Cryptocurrencies
Crypto, in its totality, is valued in the region upwards of 202 billion USD which justifies the curiosity underlying researching pricing fluctuations and the several underlying reasons behind it. The term cryptocurrency has been thrown around a ton this previous year owing to the latest crypto bubble which took place approximately around the spring of 2018 where the price of a particular cryptocurrency referred to as “bitcoin” skyrocketed to 20,000 USD for one coin. To obtain a slight notion of just how widespread cryptocurrencies are turning out to be, the aforementioned crypto coin witnessed $2 billion worth of transactions each day which was a ten-fold increase over the prior year.
As the world changes and technology progresses there is always bound to be a fundamental change in a system which totally revamps how everyday activities will occur. Bitcoin as a bright future but not in this shape.
It is critical to initially comprehend what precisely a cryptocurrency is prior to delving into the fundamental objective of the thesis. In simple terms, you can look at cryptocurrency as E-money which essentially exists on the internet on computers and has no physical shape or form or governmental backing or regulation. As there is no backing, the price of these currencies are decided through the market forces of supply and demand, the functions a particular currency may furnish, or any ease of payment for traders. To put it in different words, the pricing of these currencies is dependent on what the market decides it is worth.
Comprehensive insight of volatility in this market
Cryptocurrency has its basis in the blockchain, which in the future, could be leveraged as a mainstream form of payment. Although it is usually correlated with instability and massive seemingly arbitrary fluctuations with regards to their pricing. Confidence in this variant of innovative currency must be obtained in order to ensure profitability. However, in order to do this, an improved comprehension of the market and the currency in itself must be carried out. The research can only accurately commence after there is a greater comprehension of the subject in depth. As specified earlier, there is evidence of the existence of volatility within the cryptocurrency market.
An article entitled “A possible foundation of future currency: why it possesses value, what its history is and it future outlook” was put out which provided the now mainstream data that we have we have with regards to cryptocurrencies and bitcoin, however, where it stands out is that in this paper the writer introduced us to the idea of a blockchain attack and in-depth comprehension of a 51% attack, but this is a very improbable situation as bitcoin mining protocol already has a mechanism baked into it that switches mining pools following some duration not allowing for such control of the blockchain to occur and prevent consequences such as the double spending problem.
Framework
The relationship between returns in the crypto market, risks in investments and exchange rate stability have been researched extensively, and as an outcome, two empirical models are consistently leveraged when attempting to determine the level of stability within the market, however the models provide slightly differing outcomes. Throughout the research there is an absence of focus on the factor that risk causes an increase in the likelihood of return within the crypto market. There have been several instances of the erratic disposition of the price fluctuations and the requirement for diversification of portfolio and investments. For the objectives of this study, we will be correlating price stability with risk levels. The dual models that have constantly been leveraged for deciding the volatility in the financial markets are Autoregressive conditional heteroskedasticity (ARCH) and generalized autoregressive conditional heteroskedasticity (GARCH) models. The study will be concentrating on the outcomes of the GAARCH model as it furnishes generally more comprehensive and insightful outcomes.
Conclusion
It is obvious that crypto coinage is an appreciating medium of exchange with increased levels of daily trade volume, which cumulatively has been sharply escalating in the previous four years as a medium of exchange as well as a medium of investment. Individuals are purchasing and selling bitcoin all over the globe. That is why it has witnessed such large trade volumes. Industry professionals and specialists profess optimism with regards to its future and it has really minimal transaction expenses and can at some juncture become the substitute for fiat money and a brand-new cryptocurrency could be produced and be harnessed as the planet’s first international currency in the not-too-far-off future. This is keeping crypto from attaining its full potential and unless or till regulation can be placed there will never be adequate confidence for this new variant of “money” to grow. If governments can somehow undertake implementation of rules and regulations for cryptocurrencies the security and faith in it will increase and they could experience stability over the long run.