• Mar 26 2021
  • by
  • Analyst AZA

Volatility: a profitable feature for bitcoin players

Crypto-currency markets are characterized by a sufficient level of volatility and a rather limited indicator of liquidity.

This, in turn, increases the threats and potential risks for those market players who invest in block-based tools.

But alongside with increase in risks, the possible profit also increases.

But how do the experts of the stock exchange struggle with the problems - difficulties in the form of volatility and liquidity, earning on crypto-currencies, and applying effective strategies for generating income?

1. Method number one: introduction of tactics of reversion.

Volatility arises because of the instability - uncertainty.

But some tactics are based on methods and principles that allow you to profit on volatility and even work with the benefits of liquidity.

These tactics minimize market inefficiencies, so they are very attractive for many traders.

They are based on the average deviation - the theory, which tells us that after the expiration of the arrest, the value of the stock will tend to the average price value.

In other words, having the information that the price of the asset should be directed to the average value, we can freely profit from this by earning money on the market.

One of the most simple tactics is the application of the price of sale and purchase in the role of a market maker.

If the Exchange de facto returns to its previous state, then the tactic will bring us revenue from the difference in prices - purchase and sale.

It is this difference that is called the quotation break and is actively used in the implementation of this meth method of average deviation.

If the market has made a return to the past position, then the tactic is capable of making a profit from the price difference - purchase and sale.

Hence the notion of «gap quotes». Supporters of the average deviation on the stock exchange, use this model of behavior, which implies that the market always approaches the real price of the asset.

Market fluctuations arise because of the low confidence of certain exchange market players, or because liquidity at different stages is simply absent.

Traders who trade with tactics based on the average deviation, eliminate this difference - between buyers and sellers, and strive to make a profit on it.

This technique is most acceptable for overly volatile exchanges, in which reversion is at medium levels.

Such a characteristic as volatility demonstrates the best value of market movements - how large the stock market fluctuations.

In case the volatility is high enough, then there is a high chance that this tactic will be effective and at the output will bring us revenue.

If the markets are not highly volatile, and, accordingly, price gaps are small, then such tactics will not be highly profitable.

For this technique (tactics based on averaged deviation), the site will be perfect, which is characterized by a horizontal price movement, on which there are a lot of fluctuations and increased volatility.

These kinds of markets are very profitable and effective for market-making tactics and medium-displacement strategies.

Let us consider in more detail the operation principle of the mean displacement

The tactic of the average bias, as mentioned above, works and profits on the difference between the purchase price and the sale price.

The market has a concept of average value: this price includes all the assumptions and hypotheses about the real price.

For example, a large market trend acts as an equalization of the average price.

The price gap, in reality, is largely under the influence of the volatility of the exchange and the asymmetry of its profits.

This asymmetry is calculated by the probability of moving the market: up or down.

As a rule, the probability of this kind of movement is not identical, whereby this price gap can be projected.

The magnitude of the price gap largely depends on the level of volatility.

If the volatility is high, then the bids for purchase or sale will be realized more accurately, but it is also necessary to take into account the fact that price jumps on the stock exchange will differ in a large range, as the market is dominated by sharp price changes.

In case the volatility is lowered, this may not result in the results for buying or selling, and based on tactics, we will have to decide our deal - to save the asset, or to earn and get money, and make a stop on a short position.

To calculate the level of volatility of the sector, we use, in calculations, the exponentially weighted moving average-EWMA.

You can either prove or refute the profitability of this tactic of average deviation.

To confirm (or vice versa), you can conduct a small analysis - to study the cost of buying or selling for bitcoin - from the time of the origin of the cryptocurrency and until the fall of 2017.

Using the source Cryptocompare, and noting that the average data on volatility is about 116%, we need to determine the gap in the quotation: the gap at the limit of 1% between the purchase price and the cost of sales.

If the profit is distributed optimally, the gap will be eliminated in 10 days, and the probability will be 99.6%.

Of course, the income from the cryptocurrency (bitcoin) can not be attributed to the standard distribution.

But how likely is a player to be able to trade in bitcoins in 10 days and earn an income equal to 1% each day?

If you rely on this information and operate on data, you can state that the tactics differed productivity for 2297 days from 2615, or 87.84% of the time.

The player can improve tactics by analyzing variability and adjusting the gap.

Higher volatility will give us a higher profit from the price gap, and vice versa.

And of course, if a trader uses the tactics of average deviation, then he should take into account the liquidity of the stock exchange.

However, trade, which is based on the strategy of average deviation plays an important role in the formation of effective exchange mechanisms.

Revenue, market-makers, is largely due to low and sustained gaps.

The relationship between liquidity, what they realize, and the stability of the price gap exists.

However, the tactics that are built on the average deviation increase the liquidity of the exchange.


To calculate the level of volatility of the sector, we use, in calculations, the exponentially weighted moving average-EWMA.


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