So why has Bitcoin suddenly become more volatile? There is no singular answer, but several. Let's examine the most important ones in turn. Although some of us called it at the time, in only a month's retrospect it is crystal clear that investments in crypocurrency had formed a huge bubble. Economist Nouriel Roubini in fact declared it to be the " Mother of all Bubbles ", and the largest recorded bubble in history.
Contrary to popular perception, economic bubbles do not collapse completely in a single day as with a balloon popping, but usually take some months to fully deflate. For instance, the stock market bubble began to deflate as early as September of that year, had massive selloffs in October, but didn't fully bottom until February, Ditto for the crash, which started in June of that year, but the market didn't bottom until February, Very similarly, the dot-com or, more accurately dot-con crash which began in the spring of didn't bottom until almost a full year later.
For that matter, even the infamous Tulip Bulb Bubble in took some months to fully deflate. All of these bubbles had plenty of "false bottoms", where it looked for a while like the price would creep back up. If history is to be followed, the cryptocurrency bubble had just started to deflate, and there is still plenty of falling left to do. It is the old joke about the man who jumps from the Empire State Building, and on passing the 80th floor on the way down says, "Well, so far, so good.
Stock market crashes never bottom at zero, for the reason that at some point market fundamentals take back over and folks can see a return for their investments. Take Microsoft stock, which got hammered in the dot-com bust of from a high of Why didn't Microsoft stock go to zero as did so many other tech stocks around that time, or as Lehman Brothers did in ? The reason is that Microsoft's stock had a fundamental price to fall back on, as Microsoft continued to turn out and sell its operating system and lucrative Office products.
At some point, investors could see that both Microsoft was going to survive, and that Microsoft would continue paying dividends to investors by which, eventually, they would not only get their investment back but also get a decent return. Contrast Microsoft in with Lehman Brothers in , where the latter was so leveraged by its mortgage-backed securities products that it became insolvent and offered no chance for new investors to have hope of even getting their principal back, much less any return.
The problem with buying a Bitcoin is that it doesn't generate a return, but is simply an internet token that is used as an alternative to transfer money between its users and for which they have to pay fees with each transaction. In other words, Bitcoin has no fundamentals, and will never have fundamentals. The only thing that Bitcoin investors have is a hope, or maybe closer to a prayer, that the value of Bitcoin will increase in the future based on demand.
Even the latter seems bizarre, since there are over 1, cryptocurrencies which do about the same thing that Bitcoin does, and it doesn't take much more than a sharp mathematician with an algorithm to create a new cryptocurrency, i. That cryptocurrencies, including Bitcoin, lack a fundamental price has another ramification, which is that it seems impossible to price individual units of crypocurrency at much above zero.
The point is: If you don't know what the price of Bitcoin or any other crypocurrency should be , then you have utterly no idea whether you are overpaying or underpaying for it. At the very least, this circumstance will contribute to high volatility.
In recent days, there has been no shortage of articles discussing price manipulation in Bitcoin , with clear evidence of significant price manipulation occurring in , and in the run-up. Price manipulation is simply the flip-side of the so-called benefit of cryptocurrencies that they are not subject to government regulation.
Without regulation, bad actors can manipulate the price of cryptocurrencies and then cash out rich long before the rest of the investors catch on. Even as the Bubble deflates, there seems to be quite a bit of bull trapping going on, by key low-volume trades being made which seem to indicate a price-reversal upwards, and then selling to these fooled investors at the higher price.
This sort of market manipulation significantly contributes to volatility. Any asset that doesn't have a fundamental price is a target for scam artists, who can spin a big fish tale as to what the asset should be worth. News like this causes investors to wonder: "Which cryptocurrencies are real, and which are fake? Are any of them real? Because cryptocurrency has neither an intrinsic value nor is capable of being valued according to fundamental analysis, the institutional investors are largely staying away.
Thus, cryptocurrencies are denied access to that largest ocean of wealth, and instead must rely on individual investors worldwide. The downside is that individual investors are rarely buy-and-hold investors or have an investment horizon much past the next official holiday, whereas institutional investors take the long view of their assets and may be content to hold particular assets for years before they pan out.
The lack of institutional investors, with their buy-and-hold views, is one of the biggest reasons for the extreme volatility of cryptocurrencies. When the cryptocurrency bubble was building in , not just a few financial advisers told their clients to make bets in Bitcoin and other alt-currencies. By the end of that year though, most of the larger brokerage firms began banning trading in crytpocurrency as being too speculative which is a gross understatement.
This likewise took potential buy-and-hold investors out of the cryptocurrency marketplace, and has contributed to volatility. As an aside, not just a few of the financial advisors who told their clients to buy Bitcoin and its brethren when it was near the high, are now expressing a newly found interest in asset protection planning.
One of the biggest selling points for cryptocurrency has been that it has the potential to store value against inflation involving the governmental currencies.
Here, Venezuela is an oft-used example. Stated otherwise, it is small comfort that a cryptocurrency might or might not provide protection ten years from now if there is increased inflation, if you are risk of losing a substantial part of the value today. The bursting of the "store of value" argument for buying cryptocurrency is also leading to its increased volatility -- sort of a self-fulfilling prophecy in the negative.
This is the biggest farce of them all is the idea that if somebody is buying Bitcoin, or any cryptocurrency, they are "buying the technology". This is a reason for buying and holding Bitcoin that many of the true-believers frequently express, quite wrongly. A person that owns Bitcoin is not an owner of the technology, but rather just a user of the technology, which is quite different. No Bitcoin owner will receive a royalty if anybody else buys or uses Bitcoin. To the contrary, to use Bitcoin the owner must pay transaction fees.
This argument is similar to somebody buying a hair dryer because they "believe in the technology". Well, that's great, but it doesn't mean that the purchase of the hair dryer will profit from the technology, other than by their own enjoyment of it.
To a significant degree, Bitcoin's price is being propped up by true-believers, being folks who seriously believe that Bitcoin will someday become the world's currency and they will thereby get rich because of it. The true-believers refer to themselves by the intentionally mis-spelled term "hodlers", and have more than their fair share of sovereign citizen and other anarchist types.
The hodlers are bolstered in their efforts to defend Bitcoins' price by the desperate, being folks who bought into Bitcoin when it hovered north of 15, and then promptly lost half or more of their money. These poor literally folks are doubling-down on Bitcoin, much like a gambler who has lost a bunch of money, and then gambles the balance to try to make it back up.
However, the latter group of credit purchasers of Bitcoin are either running out of credit or their banks no longer permit the purchases of Bitcoin with credit cards. Another way to look at this is that double-down makes one run out of money twice as fast. Both hodlers and the desperate have the same thing in common, which is they have a bullish tunnel-vision that Bitcoin will return to its prior heights. This is not fundamental price analysis, but simply prayer. Folks continuing to buy Bitcoin regardless of the lack of fundamentals, also contributes to Bitcoin's high volatility.
Let's assume that we have a bunch of players around a table with one of those cheapie poker chip sets, which has white, blue and red chips. Let's say that Bitcoin is the red chip, and the blue and white chips are some other cryptocurrencies.
The value of the chips is simply what the players say it should be. Thereafter, there is no poker game, but the players simply sit around and trade chips based on what they think the chips might be worth at the end of the game. Some players take additional wallets out of their pockets, and buy more chips from other players, who take that opportunity to cash out.
Some players leave, and new players come in, but the trading continues. The values of all chips, including the red Bitcoin chips, are worth at only given moment what two players agree they are worth when they make a deal.
The prevailing price for chips becomes simply a function of whether there are more players who believe they will go up in price, or they will go down in price. This is what trading in cryptocurrencies is really all about. It is simply the purest speculation, since Bitcoin itself doesn't do anything to generate additional income unlike stocks which pay dividends or bonds that pay interest. In other words, Bitcoin is a speculator's dream, since there is no outside event that will impact its price, other than what other investors believe the price is going to go up or down.
This is also why selling futures contracts and other derivatives in Bitcoin is at the same time both ludicrous and makes perfect sense. Cryptocurrencies, including Bitcoin, will always be volatile except maybe when the price is very low because at the end of the day they are all about speculation -- this has become their primary use, for bulls and bears to have something to fight over.
My practice is in the areas of creditor-debtor law and captive insurance. I am the auth The Cryptocurrency Bubble Has Only Started To Deflate Although some of us called it at the time, in only a month's retrospect it is crystal clear that investments in crypocurrency had formed a huge bubble.
The Bitcoin Bubble Jay Adkisson. Jay Adkisson. Read More.
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Bitcoin is the first cryptocurrency and was designed to function as a medium of exchange and a store of value. These functions are affected by its price volatility, which is much higher than those of traditional currencies. In this article, we will bitclin to explain what is Bitcoin volatility and what causes it. The general definition of volatility is the standard deviation of logarithmic returns on an investment, meaning the price fluctuation of Bitcoin over a certain period of time. A more volatile asset volstility larger price movements and this can be seen on the price chart as, after buying or selling some Bitcoins, the price would change by no small amount in just a few minutes. As a result, the higher volatility of Bitcoin can contribute to greater profits or losses. This makes Bitcoin a great asset to trade has it can provide higher potential returns than an asset with little volatility.
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However, the ride has been anything but smooth. Since , Bitcoin has experienced five major crashes and each time a major rally pushed the price beyond the previous all-time high. Meaning, Bitcoin is five times the risk of the riskiest asset class of most portfolios. This means that the volatility of Bitcoin will be undergoing an evolution in which it will organically decrease across time. Understanding the maturation of these drivers is essential to determine what is the appropriate weight of crypto assets within a portfolio. In this note, five sources are identified:. The terminal supply of Bitcoin is known.
Danny Bradbury wrote about bitcoin and other cryptocurrencies for The Balance. The first bitcoins came in to existence in The issue is that retail investors are considerably more prone to allow their emotions, rather than logic, to dictate their trading activity. Though difficult to pinpoint, we think the demand is coming from transactions between crypto exchanges, few retailers, and from countries whose currency is in distress. Your Money. That, combined with the lack of liquidity, makes it easy for people to manipulate the market. MTC does attempt to take a reasonable and good faith approach to maintaining objectivity towards providing referrals that are in the best interest of readers. Stock market crashes never bottom at zero, for volatikity reason that at some point market fundamentals take back over and folks can see a return for volagility investments. Under the new tax law, users would have to record the market value of the ahat at the time of every transaction, no matter how small. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed. Hackernoon Newsletter curates great stories by real tech professionals Get solid gold sent to your inbox. In the near term causea, much of the volatility golatility be driven by investor perception of the ability of gateways to safeguard individual holdings and provide for a reliable store of value as adoption increases. They are small but rapidly growing. He has won awards for his investigative reporting on cybercrime. Bitcoin still remains at the center of the crypto economy.