Why is bitcoin so volatile?

Why is bitcoin so volatile?

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So you want to play crypto and become a millionaire overnight? Get ready for more days like Wednesday.

Bitcoin dived up to 30% at around $ 30,000, according to Coin Metrics. Ether fell more than 40% in less than 24 hours, breaking below $ 2000 at one point. The two regained substantial ground at the end of the day.

But it’s the same in the world of cryptocurrency trading. Huge accelerations and equally drastic drops. Again and again.

“Massive retracements are always scary, but seasoned investors tend to view them as buying opportunities,” said Mati Greenspan, portfolio manager and founder of Quantum Economics.

Crypto and market experts tell CNBC this is the new standard in investing and traders should just get used to it.

Value and volatility

Bitcoin’s volatility has to do with a lot of things.

On Wednesday, for example, news from China cracking down on banks doing crypto transactions, as well as favorable winds from You’re hereThe decision to no longer accept bitcoin as a form of payment has certainly helped fuel the carnage between digital currencies. The overall crypto market was also likely due to a correction after weeks of record climbs inspired by tweets, courtesy of Elon Musk.

But volatility is also the price bitcoin investors pay for its limited supply and lack of a central bank to control that supply – precisely the characteristics supporters say give it.

Part of what makes bitcoin valuable is the fact that it is scarce. There is 18.7 million Bitcoin in circulation, which is approaching its maximum threshold of 21 million.

New bitcoins are created as a reward for miners, who contribute their computing power to verify transactions on the decentralized network. Over time, the size of these rewards decreases, so each new block completed earns less miners than before.

As a result, the supply of bitcoin is perfectly inelastic. “An increase in demand cannot lead to an increase in the supply of bitcoin or increase the speed at which bitcoin is issued”, wrote Ria Bhutoria, former research director for Fidelity Digital Assets.

Bitcoin’s value is also derived from its decentralized network. There is no central authority with the power to intervene in the bitcoin market.

“No central bank or government can intervene to support or support markets and artificially mitigate volatility,” Bhutoria continued. “Bitcoin’s volatility is a trade-off for a market without distortion.”

In addition, bitcoin is still very new.

“[It’s] only 13 years old and therefore doesn’t have much of a business history, “explained Peter Boockvar, chief investment officer at Bleakley Advisory Group.” While a company that went public yesterday as part of an IPO Stock market has no history, a company can at least be assessed on its business prospects, profits and cash flow. “

Because bitcoin is still a nascent asset class, it remains in the price discovery phase. “[It’s] the most volatile lifecycle of any asset, ”said Mike Bucella, general partner of Blocktower Capital.

“Bitcoin has clearly established itself as a new form of value, but the terminal value is still not defined,” Bucella continued. “This lack of information lends itself to a momentum, or a technically motivated market, without new information.”

The path to true price discovery is often strewn with seismic pitfalls, but Bhutoria points out that the alternative is artificial stability, which can result in distorted markets that can collapse without intervention.

Get used to

Bucella believes that today’s trading volatility will repeat itself.

“There will be many periods as we have seen today, where a negative news cycle has caused the technical levels (and momentum) of the price of BTC to disappear – and these are all the more exacerbated. when market players start to take leverage, “Bucella continued.

What happened today is pretty typical: Spot selling breaks a key level and the leverage is liquidated, creating a more dramatic sell off than the market would otherwise indicate. Bucella says it’s been the same pattern, over and over again, over the past decade, and he believes it will stay in place until we reach a mature level of adoption.

Ultimately, “high risk and high return” tends to be the rule of investing, and this is especially true for bitcoin.

“All investments come with risk, and just like stocks, crypto is subject to price fluctuations,” said Noah Perlman, chief operating officer of Gemini. “Bitcoin is still a young asset class, but it’s one of the best performers of the past decade.”

Playing the long game is also crucial. “As with any market, crypto investors with a longer time frame and a diverse portfolio will see more consistent results,” said Greenspan.

Bitcoin’s volatility also has a sort of “halo effect” on companies exposed to cryptocurrency.

Tesla, which has a $ 1.5 billion stake in bitcoin, fell about 2.5% on Wednesday. Microstrategy, another company that holds a large amount of bitcoin for its corporate treasury, ended the day down 6.6%, and Coinbase, the new public crypto exchange that specifically warned in its S-1 that it was vulnerable to volatile fluctuations in the price of cryptocurrencies, fell 6%.

But for Bucella, this kind of volatility is a gift that most fund managers in traditional markets would salivate over. “As a fund manager, with the right risk management, infrastructure and tools, this level of volatility presents huge opportunities,” Bucella said.

Whatever your tolerance for risk, experts say volatility won’t always be so bad.

Bitcoin trading is no longer dominated by retail buyers. Professional fund managers and American companies have been flooding the market over the past year, and they are still getting started. As more institutional investors embrace bitcoin, it is giving cryptocurrency new legitimacy, helping to erase its reputation risk. It also creates more stability overall.

“With greater adoption of bitcoin and the development of derivatives and investment products, bitcoin’s volatility may continue to decline, as it always has,” noted Bhutoria.

And as longtime value investor Bill Miller pointed out in a CNBC interview earlier this year, “One of the cool things about bitcoin is that it becomes less risky the higher it goes.”

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