Volatility and the case of Dogecoin

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If you have seen any news about cryptocurrency in the last few weeks, it’s likely to be something about their “all time high” or “all time low” price. Some headlines will point out new prices breaking previous barriers, whilst others will display cryptos deep into the red zone. This behaviour shows their high volatility. The value of cryptocurrencies tends to swing dramatically in relatively short periods of time (known in traditional markets as high volatility)

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The volatility of the crypto market is what makes it so appealing for some: it generates the possibility of having great gains in a short time. However, this is also the reason why is so risky to invest in: the value can collapse, rendering the investment worthless. All in a short period of time, during which it is difficult to predict the fluctuations and properly react.

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Why are cryptocurrencies so volatile? Here are some reasons:

• Speculation: crypto are subject to speculative trading.  Buyers purchase cryptocurrency with the hope of profiting in a short time. This means, they buy large amounts --making the price go up-- to then quickly sell --making the price go down.

• Media coverage: the impact of media coverage in the public, leads to buy the best known coins, to sell if there is bad press, and to follow the moves of influential personalities. Added to speculation, it contributes another factor for volatility.

• Whales: this is the term for people/institutions that hold a large (really large!) amount of cryptocurrency. If just one of these whales sells a high fraction of the crypto they possess, it creates waves that impact the price of the coin.

• Sentiment: And here we arrive at the case of Dogecoin (DOGE) 

This cryptocurrency, often described by its “meme” origin, has a far more interesting characteristic than the meme-dog: Dogecoin is the fans’ favourite coin. This crypto counts with a fan following which includes names like Elon Musk, Mark Cuban, and Gene Simmons. Why do they like Dogecoin? because it is fun, disruptive, the symbol is a dog… in all fairness, the reason why someone likes something is not important. What is important in this case, is that these fan followers decide to buy and talk in social media about Dogecoin, amplifying its value and impact.

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Dogecoin price often surges after a tweet by Elon Musk -- “the Dogefather” being the latest example. And the explanation is no other than “sentiment”. Dogecoin surges because of the sentiment of their fans, which translates into a loyal legion of buyers.

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This is a clear departure of fiat. The volatility of crypto cannot be explained just with economic terms, it also responds to the taste of its followers. And giving the fact this is a new market, is much more sensible to people’s (crypto holders) behaviour.