What is volatility?
Volatility is a measure of how much the price of an asset has moved up or down over time. Generally, the more volatile an asset is, the riskier it is considered to be as an investment. Some investors dislike volatility so much that they refuse to even enter the markets. However, high volatility is part of the appeal in crypto; it creates the possibility for high returns.
What are some of the reasons for high volatility?
There are several reasons why crypto currencies can be volatile. A cryptocurrency's price might fluctuate because it is influenced by supply and demand for that coin which could depend on the investor and user sentiments, government regulations, and even media hype. For example, news such as, “China cracked down on banks completing crypto transactions” can certainly cause a turmoil in the crypto markets causing some investors to panic and ‘sell at any cost’. This causes the price to drop suddenly. On the other hand there are traders who are waiting for opportunities like these to so called ‘buy the dip’ causing the price to rise sharply. And because crypto is a newer asset class compared to other investment assets, there is tremendous uncertainty and lack of clarity amongst investors resulting in the potential for significant upward and downward movements over shorter time periods.
Volatility exists in Stock Markets too. Stock market volatility is largely caused by uncertainty, which can be influenced by interest rates, tax changes, inflation rates, and other monetary policies but it is also affected by industry changes and national and global events. Specifically, stock volatility is higher in the United States because it increases with investor protection, stock market development, new patents, and firm-level investment in R&D.
How does Coinchange manage cryptocurrency volatility?
At Coinchange we have several ways to manage the crypto currency volatility.
- We eliminate any bias in our process to analyze strategies and underlying protocols, by using a standard set of framework, risk metrics and models which help us filter out the noise.
- Our yield generation strategies are price agnostic and do not involve timing the market. Strategies deployed, rely on underlying utilization of the DeFi (Decentralized Finance) protocols, so we generate DeFi Revenue as long as DeFi as a sector has utilization and traction. We monitor the liquidity metrics of the protocols and only participate in those that are highly liquid. We process vast amounts of market data to give us predictable insights into when is a good time to rebalance our capital allocation amongst various yield generation strategies to weather the short term volatility and liquidity issues
- We greatly reduce the volatility of the DeFi revenue we generate by providing robust stablecoins strategies. We allocate funds in stablecoins that are pegged to the USD, which are a great way to generate yield while reducing volatility. (read our article on stablecoins to learn more about how they work).
- Lastly we hedge against market risks (price volatility) by designing market neutral strategies thanks to a strong team of quantitative analysts and developers. This mechanism is automated by our algorithm which automatically rebalances the hedge based on the market condition that affects the strategy.
Why does our yield change?
Although our yield is not wildly volatile, it changes from time to time. Others that promise a fixed yield all year round, often offer very low yield and do not share the excess profits that they generate with their customers. In Coinchange’s case, the DeFi revenue generated from certain protocols can start to decrease due to participants joining the pool leading to dilution. Hence our customers’ yield can temporarily lower until we transition to the next high APR(Annual percentage rate aka the yearly interest we pay to our users) strategy.
To mitigate for that, Coinchange constantly develops new yield generating strategies with higher APRs, and then passes on those gains to the clients. One thing to note is that Coinchange strategies that provide DeFi revenue are based on underlying utilization of DeFi protocols, hence utilization can have fluctuations which are much less when compared to the price volatility. On the other hand, companies that offer fixed yield rates often find it hard to weather a crypto winter and they mostly run out of business. At Coinchange, we are in this for the long term and believe in fair distribution of the reward for our customers.