Last week, I wrote about the different methods used to calculate and express daily price changes in stocks and cryptocurrencies.
The big takeaway? Since cryptocurrencies trade in a 24/7 fashion, there is no closing price to quote. Instead, daily price changes are calculated by comparing the current price of the asset to the price of the same asset 24 hours earlier, and calculating the percent change between the two numbers.
Using this trailing 24-hour percent change calculation, however, can produce some very strange results.
As I wrote last week:
“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.”
Today, I want to show you two examples of just how wildly distorting that rolling calculation can seem, using two hypothetical charts depicting bitcoin prices over a 48-hour timeframe.
In our first example, we have a chart that shows the price of bitcoin rising about 3 percent in Day 1, as depicted by the yellow bar.
On Day 2, bitcoin essentially goes sideways for 24 hours.
Now, take a look at what happens to the 24-hour price change during Day 2, as shown by the dark brown bar.
When Day 2 begins, the 24-hour change displays an increase of just over 3 percent. As the day progresses, however, the 24-hour change begins to “roll off” – until this figure hits zero on at 11:59pm.
Of course, all the 24-hour price change depicted by the brown bar during Day 2 happened when there was very little change in the value of bitcoin: the movement in 24-hour price change came entirely from “legacy” price volatility from the prior day.
The example shown in the second chart is even more unusual.
On Day 1, the price of bitcoin is very volatile.
Between 3 a.m. and 5:30 a.m., the price of bitcoin spikes up about 18 percent on a straight price basis – then bounces down a bit, between 6 a.m. and 7 a.m., and finally crashes over 20 percent between 11 a.m. and 4 p.m.
On Day 2, bitcoin trades basically sideways all day.
As the price stays flat, however, the 24-hour price change bounces all over the map. First, the 24-hour price change crashes more than 15 percent, then it spikes up over 8 percent, crashes down around 15 percent again, and ultimately “rolls off” at zero at day’s end – showing absolutely no change over the course of the 24-hour period.
For investors – especially retail investors new to the cryptocurrency space – it’s easy to see how the 24-hour percent change convention could be confusing.
If you’re new to trading, you may want to check your charts twice.by