Volatility Spillovers Among The Cryptocurrency Time Series!

3 Mins read

Cryptocurrencies can be attributed to their innovative features, transparency, simplicity and increasing popularity. The best trading platform for this is bitcoincode that has an artificial intelligence than other trading software. However, the tipping point in cryptocurrency is the buying and trading of these assets among users, which has led to increased volatility.

Volatility Spillovers Among The Cryptocurrency Time Series

The volatility spillovers are empirically obtained via rolling regressions on cryptocurrency time series of data. For example, the recent data show that increased volatility of the bitcoin trading increases the volatility in the subsequent Bitcoin price and inversely. In general, it is usually found that cryptocurrency prices react to the volatility of other cryptocurrencies. It suggests that traders are sensitive to and attempt to pass on information on volatility via their trading activity.

Very little information and evidence on how this trading activity affects broader market trends. It makes it very important to study various spillovers of the cryptocurrency prices from different markets, such as futures, forwards and spot contracts held by different traders across different countries.

Why Are Cryptocurrencies Volatile?

Why Are Cryptocurrencies Volatile

Cryptocurrencies have no intrinsic value. The price of cryptocurrencies is solely based on traders’ expectations of future demand for the cryptocurrency. Some individuals believe that blockchain technology and cryptocurrencies will revolutionize the whole financial system or at least become a mainstream tool for financial transactions, if not now already. This belief explains why Bitcoin and other cryptocurrencies have risen rapidly in recent months.

On the other hand, this sudden interest from investors can also be attributed to FOMO (Fear Of Missing Out). Someone who missed out on investing in Bitcoin when it was under $1000 may feel regret which, in turn, causes him to invest more into Bitcoin to avoid missing out again. So let’s check some reasons behind the massive volatile nature of cryptocurrencies.

Let’s say there are 10 million Bitcoins, and each Bitcoin is worth $1,000. If you want to buy 100 Bitcoins, you need to spend $100,000. But if only 1 million coins are available and you need to buy 100 coins, then you need to spend $1 million for the same amount.

Though Bitcoin is widely used as a digital alternative currency and payment system, most governments still see it as an asset that needs to be adequately regulated and monitored for retail transactions.

Cryptocurrency Investor Actions

Cryptocurrency Investor Actions

Traders are often required to report the market price of their cryptocurrency holdings with regular or frequent real-time updates. Due to the increasing demand for this information, many publicly available methods allow them to do so efficiently, and they do not require highly skilled programmers. One example of such a method is anonymous API (Application Programming Interface), which allows traders to retrieve prices directly from Coinbase’s API web service.

Cryptocurrency Trading Volumes And Increases

People who buy cryptocurrencies are more likely to pessimistically expect that other people will buy too, which in turn has caused a rapid increase in their demand and price. A hike in demand and a corresponding price increase can attract more traders who may think they have missed the boat. It can lead to a rise in trading volumes of cryptocurrencies. Still, those who have understood the cryptocurrency market dynamics make a massive amount from digital currency trading.

In most cases, investors buy into cryptocurrency merely to make a quick profit on a spike of appreciation rather than as an investment vehicle. However, due to this difficulty in predicting price movements and lack of transparency, there is a lot of speculation about how prices will evolve, which may not necessarily be accurate or is only partial information.

Media Hype Is A Fundamental Reason Behind The Volatility Of Cryptocurrencies

Media Hype Is A Fundamental Reason Behind The Volatility Of Cryptocurrencies

Media noise drives the volatility of cryptocurrency markets and therefore affects the general sentiment about its price. Any news related to cryptocurrency derives some part of its value from hype, which can “spill over” into other markets.

The media will often portray a bullish picture of cryptocurrencies leading to investors buying large amounts of cryptocurrencies in hopes that their value will go up and that those who missed out on investing in them earlier will not be able to purchase them again.

In addition, investors often have different reasons to buy and sell cryptocurrencies. Thus, they tend to have different emotions regarding the market, and thus their actions can also make the price of crypto volatile.

The volatility of cryptocurrencies is driven by a combination of factors such as Media Hype, Speculation and Fear Of Missing Out (FOMO). It has historically resulted in a high correlation between bitcoin valuations and other asset prices or sentiment indicators.

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