So, you’re new to cryptocurrency …
If you’re anything like me, you’re probably awash in a sea of websites (many with the words “crypto” or “coin” in the title), and all of which look like something you might get if you locked a group of coders in a room and encouraged them to design a cypherpunk version of E-Trade.
As things stand now, as an investor or potential investor, you have probably seen big gains in cryptocurrency – but you’re still trying to get your bearings. (People around you are certainly making lots of money: Since I was hired at CoinDesk, bitcoin’s price has gone up nearly $1,000, and that’s just at the “established” end of the cryptocurrency spectrum.)
But while the big gains might be enticing, remember, you’re not just entering a new market – you’re also entering a market that may not have all of the features and conventions you’ve come to expect and rely upon as an investor.
Let’s start with one of the most obvious aspects of cryptocurrency: Markets trade 24 hours a day, seven days a week – and that feature, as I’ll explain, changes a lot more than market uptime.
For one, the 24-hour market structure requires investors to think about the daily price changes in their positions through a different conceptual lens than their stock portfolios.
In the U.S., stocks listed on The New York Stock Exchange or the NASDAQ Stock Market trade, during regular market hours, between 9:30 a.m. and 4 p.m. EST.
Sure, there are after-market hours that span from 4 p.m. to 8 p.m. But during these trading windows, liquidity is generally thinner and prices executions are less favorable. This means that investors, generally speaking, are forced to pay more to buy stock and sell at lower prices.
Finer points aside, the effect of this is that every day, every stock has an opening price and a closing price.
If you check the price of a stock you own on your phone, you can see the current price and price change, which is typically expressed in both absolute dollar terms and as a percentage change.
What’s that change benchmarked against?
It’s not that day’s opening price, as is sometimes assumed, but the closing price from the previous day’s trading session. (This makes perfect sense: stocks typically open higher or lower than the previous day’s closing price, due to trading in after-market or pre-market-trading.)
This means that if you want to calculate the price change in a given stock, you subtract the current price from yesterday’s closing price and then divide by yesterday’s closing price, and then, finally, multiply by 100 to express that number as a percentage.
– (CurrentPrice – YesterdayClose) / YesterdayClose * 100
– Or, even more simply: ΔPrice / YesterdayClose * 100
The difference with crypto
Now, let’s take a look at the cryptocurrency markets.
Because the cryptocurrency markets never close, there are no opening or closing prices that we can identify.
The workaround that is currently in place is to calculate the 24-hour price change by comparing the current market price to the price a given cryptocurrency was trading the day before at exactly the same time.
– (CurrentPrice – 24HourAgoPrice) / 24HourAgoPrice * 100
– Or, more simply: ΔPrice / 24HourAgoPrice * 100
Take a look at the stock price change formula and compare it to the cryptocurrency price change formula.
Did you notice that in the stock price change formula the denominator, which represents yesterday’s closing price, stays the same all day, while the cryptocurrency denominator keeps changing throughout the day?
What’s the practical effect of this rolling denominator?
In the simplest terms, it means that if you’re just looking at the percentage change over the last 24 hours, you can’t tell whether you’re seeing real-time price movement in the cryptocurrency or just residual price volatility from the day before.
If you’re a long-term investor in cryptocurrency, you may not worry too much about 24-hour price gyrations – but it’s still important to understand what the data you’re looking at is measuring.
Markets image via Shutterstock
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