It is common knowledge that cryptocurrency prices are very volatile, but what is the direct impact of high volatility for those trading cryptocurrencies?
System capacity is the first thing affected by high volatility. High volatility means high traffic at online exchanges, and could lead to difficulty in accessing your trading account or placing orders. Recently, one of the leading Dogecoin exchanges, Cryptsy had to temporarily suspend trading in Dogecoin. The BTC/DOGE currency pair was removed during high volatility, and this wasn’t the first time this happened.
If you are able to trade during high volatility, you could be facing delays in execution. These delays could result in trades being executed at prices that are significantly different from the quoted prices when the trade was entered. This is where order types become relevant, as a normal market order will always execute at the available rate. This order type could therefore lead to the biggest potential surprise in the actual execution price of the trade.
Limit orders on the other hand only execute at a predetermined price. The downside of limit orders is that these don’t guarantee execution. Especially during high volatility chances increase that an order won’t be executed, as prices can move away quickly from the given limit. In a skyrocketing or crashing market, it could be desirable to be able to buy or sell at any price.
Taking another look at Cryptsy, limit orders seem to be the only available order type. Each trade receives a limit at the current best market rate by default. Cryptsy refers to this as market orders, although a limit order is described in another section: “the order will fill when your offer is accepted by another user in the exchange. If your offer does not go through quickly, you might consider raising or lowering your offer making it more attractive.”
Lastly, quoted prices may also be incorrect, resulting in further differences between quoted prices and the prices at which trades are actually executed. Even in real-time markets, quotes may be far behind on what is actually happening. A perfect example of this is the 2010 Flash Crash, where “real-time” quotes on the Dow Jones were delayed by more than two minutes. The order sizes at a certain quote will also change rapidly, decreasing the likelihood of a quote actually being available.
High volatility means additional risk if you decide to trade during these times, as market conditions can affect your trade. Being aware of this allows choosing the appropriate order types (if supported), and reduce some of the risk of receiving a significantly different price than expected (or the order not executing at all).