Understanding the interplay between crypto and traditional financial markets provides valuable insights into the potential impact of broader market forces on crypto prices. From the 100 cryptocurrencies, we exclude stablecoinsFootnote 4 from our analysis since we are interested in volatility fluctuations that are not expected within that category of digital assets, remaining with 87 entities. Then, we queried from PolygonFootnote 5 the stock prices of the 42 companies included in the Nasdaq technology index with the same granularity. To compare the two asset classes, we consider the historical period between the year 2020 and year 2022 (up to October). Many of the most highly capitalized cryptocurrencies at the time of this analysis began trading after 2020, making the sample representative of the current state of the market.
Cedar Money was founded in 2022 and is a blockchain-based platform that simplifies cross-border payments for businesses in Africa. The fintech enables businesses to send high-volume payments to international suppliers at affordable rates, by leveraging digital currencies including stablecoins. “While major cryptocurrencies like bitcoin dominate the headlines, stablecoins have surpassed all others in usage. Their prominence in transaction activity show the high levels of utility they offer. They continue to play a pivotal role in broader adoption of crypto for everyday transactions outside of trading.
Practices like “rug pulls”—where promoters withdraw transactions from a digital-currency offering after selling it, thereby diluting its value—are like conventional pump-and-dump schemes. The digital-currency market, in part because of its cross-jurisdictional nature, does not have the same level of protections and controls in place that have evolved over hundreds of years in the financial services industry. But even if all these controls were in place, digital currencies are designed to support person-to-person transactions, without banks or other oversight groups as intermediaries. Understanding market trends, such as Bitcoin’s historical volatility, and the impact of global events is crucial for navigating the crypto market. Geopolitical tensions, economic crises, and regulatory decisions can significantly affect crypto prices. By monitoring these events and staying informed, individuals can make knowledgeable decisions and implement effective risk management strategies.
These challenges might result in constraining the offering of some services to a subset of digital currencies, or taking other mitigation measures (described later). China, which accounts for most of the world’s bitcoin mining, has moved aggressively to crack down on cryptocurrencies. In September 2021, Chinese authorities announced a sweeping ban on all crypto transactions and mining, causing the price of some cryptocurrencies to fall sharply in the immediate aftermath. According to the Atlantic Council, at least eight other countries (Algeria, Bangladesh, Bolivia, Morocco, Nepal, Pakistan, Saudi Arabia, and Tunisia) have banned cryptocurrencies, while dozens more have sought to restrict adoption of digital assets. However, such restrictions are hard to enforce, and crypto exchanges have generated tens of billions in revenue from countries with cryptocurrency bans. Meanwhile, most other governments have so far taken a relatively limited approach.
Individuals can make peer-to-peer transactions with cryptocurrencies without a central authority or intermediaries. This characteristic has made them particularly appealing to those concerned about government control and censorship in traditional financial systems. Another relevant factor contributing to the popularity of cryptocurrencies is their growing acceptance and use as a form of payment by merchants and businesses in less-developed countries where only some have access to a traditional bank account. However, beyond those premises, the cryptocurrency market is still relatively immature and subjected to substantial uncertainty and sudden failures. In that regard, the cryptocurrency market historically showed high volatility traits (Bouri et al. 2019, 2020a, b) and potential for significant returns, resulting in being attractive for retail investors. Therefore, despite its growing popularity, the cryptocurrency market, if viewed in the context of price versus more mature asset classes, is notoriously unstable, with frequent and substantial fluctuations in value.
Even though the level of on-chain activityFootnote 6 is still a fraction of the volume of off-chain trades that happens on centralized exchanges, it is in the process of growing and represents an element of novelty compared to traditional finance. Our analysis focuses on off-chain data for comparison with the equity market, but substantial activity on a decentralized platform makes the market less reactive and fractionated (Aspris et al. 2021). Indeed, traders can often find arbitrages between centralized and decentralized exchanges. Hence, the cryptocurrency market is slower than the equity one at transferring information into the quoted prices due to these two concurrent layers of activity. The results obtained at a high-frequency level for the cryptocurrency cross-section highlight an absence of the leverage effect in the traditional sense, where a negative return impacts future volatility more than a positive one.
These digital assets are designed to maintain a stable value by being pegged to an underlying asset, such as a fiat currency or a basket of assets. During times of high volatility, traders can use stablecoins as a means of preserving their capital. By converting their crypto holdings into stablecoins, they can reduce their exposure to the inherent volatility of other cryptocurrencies. Stablecoins provide a level of stability within the crypto market, allowing traders to navigate turbulent times with more confidence.
Keeping a close eye on regulatory updates is crucial for understanding and anticipating potential volatility in the crypto market. Cryptocurrency is a decentralized digital currency that functions on blockchain technology. It has nothing to do with the centralized or government-based control that characterizes fiat money. Payment, trading, and investment for any cryptocurrency have widely adopted bitcoins, Ethereum, and stable coins such as USDT.
The next step is to reorient them to digital currencies, supplement them with specific capabilities related to this asset class, and train people accordingly. The risk of getting caught in a speculative bubble or market-driven price cash depends on how speculative the activity is in a digital currency. Stablecoins, which are pegged to fiat-currency values and hold underlying collateral (in the peg currency, or more often in highly liquid assets, such as treasuries), are often marketed as being relatively risk free. While the future may see reduced volatility through technology and adoption, it’s important to acknowledge that volatility is inherent to the crypto market and may never be fully eliminated.
