Which Cryptocurrencies are the Most Volatile and Which Most Stable?

Jan 31, 2018, 12:43PM
4 min, 49 sec READ

Since the launch of Bitcoin in 2009, cryptocurrency prices have been known for their price volatility. Following on from Bitcoin, many other cryptocurrencies were subsequently launched, and there are now 1491 listed on market data provider coinmarketcap.com.

Almost all cryptocurrencies have shown volatility levels comparable to that of Bitcoin, and to a large extent, their price movements show a strong correlation. When the wider cryptocurrencies market is bullish, most rise and when bearish, most fall. 

As the ‘poster boy’ of the market, Bitcoin sentiment has a very strong influence on general cryptocurrencies market sentiment. Despite the fact that its dominance of overall market cap has dropped to historic lows, the correlation appears relatively stable.

Bitcoin’s volatility levels, always spectacular in the context of traditional tradable financial instruments, have hit new heights over the past few months, particularly December ’17 and January ’18. And the wider market has mirrored this. However, despite close correlation, there are differences in the average daily volatility levels between the different leading cryptocurrencies. Is Bitcoin actually the most volatile, are others even more so and are there any significant cryptocurrencies that display markedly less volatility than their peers?

Within the Cryptocurrencies Context, Bitcoin is Not So Volatile

The data demonstrate that with an average daily swing of just over 5%, Bitcoin has actually been the second least volatile of the major cryptocurrencies over the past three months. That’s still, of course, hugely volatile. Over the past three months, the average daily volatility of EUR/USD has been 0.66%, according to investing.com’s forex volatility calculator. 

Nonetheless, it’s nothing compared to Cardano’s average daily volatility of 11.59%. Even Bitcoin Cash, the result of a summer hard fork in the Bitcoin Blockchain, has seen average daily volatility of 9.18%. The least volatile of the leading cryptocurrencies has been Ethereum, with an average daily movement of 4.66%. 

What Makes a Cryptocurrency More or Less Volatile?

Are there any clear conclusions to be drawn from the levels of average daily volatility demonstrated by the leading cryptocurrencies? The answer has to be a fudged yes and no. 

Liquidity

Generally speaking, the level of market liquidity of any exchange-traded asset is correlated to volatility. The higher the liquidity levels, the lower the average volatility tends to be, at least over the longer term. A few significant sellers or buyers entering shallower markets have a more significant impact on overall supply and demand. The fact that Bitcoin and Ethereum’s market capitalizations, $191.5 billion and $102.8 billion respectively, clearly mean their markets are significantly more liquid than that of other cryptocurrencies. In 3rd place is Ripple with a market cap. of less than half that of Ethereum at $51.3 billion. NEM, 10th by market cap., is only $8.5 billion. Higher market capitalizations mean more buyers and sellers and less overall influence from big buy and sell orders. 

While Ethereum has a smaller market capitalization than Bitcoin, there are many more daily Ethereum transactions than those of Bitcoin. By mid-January, the value of daily Ether transactions was $29 billion. Ethereum’s Blockchain can handle millions of transactions a day, while Bitcoin’s only 240,000. The number of daily Ethereum transactions totals more than those of Bitcoin and the next five cryptocurrencies by market capitalization combined. 

While Bitcoin is intended to be used as cash, it is currently more traded as an asset or held as a store of value, like digital gold. Its price volatility and the slowness of transactions being confirmed by its Blockchain means it isn’t currently a realistic fiat cash alternative. Ethereum, on the other hand, is used to pay for using the Ethereum Blockchain platform to build smart contracts and decentralized applications. Use of the platform is growing, and this means steadily increasing daily Ethereum transactions. Many holders of Ethereum’s Ether cryptocurrency are actually ‘spending’ it on the platform and not just acquiring and selling it as traders or speculative long-term investors. 

The greater prevalence of Ethereum actually being utilized as it is supposed to be and not only as a traded asset, combined with its large market capitalization, clearly help reduce its volatility in comparison to peers. Several of the other major cryptocurrencies also act as tokens on Blockchain platforms with a specific utility. NEO and EOS are also smart contract platforms and Ripple, NEM and Stellar with applications in financial services. However, Ethereum has higher levels of current use and, therefore, transaction volumes. 

Sentiment

Cardano, the major cryptocurrency with the highest volatility over the past three months, ironically has the stated aim of creating a more ‘stable’ cryptocurrency ecosystem. It attempts to address the technology issues that have hindered Bitcoin and led to its ‘scalability problem’. To a large extent, also ironically, its volatility is the result of markets believing it genuinely holds the potential to achieve this aim. It has quickly gained traction as a result and this quick rise to prominence, and surging price, has led to volatility. 

The Cardano case demonstrates another major influence on cryptocurrency volatility – sentiment. Because the cryptocurrencies market is so nascent, the most significant price driver is news related to opportunities, successes, and threats. New breaking that a big project or event that will boost adoption of a particular cryptocurrency is underway led to a price spike. News of developments that threaten a particular cryptocurrency, or wider market, such as regulatory crackdowns, usually means prices will plunge. As such, when sentiment is positive or negative around a cryptocurrency, it is most volatile. Positive sentiment that Cardano might help make cryptocurrency markets more stable has made it especially volatile recently. 

At present, news-driven sentiment can arguably be considered the single greatest influence on cryptocurrency volatility, though liquidity levels are also a major factor. 

Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.