“Crypto markets are volatile because they are free. There is not more powerful narrative than that” — Paul Ebeling
For crypto investors who have been in the market a while, volatility is not a deterrent, it is a feature, and not because of the potential of outsized returns. It is a feature because it highlights the market’s relatively unique freedom.
Cryptocurrency markets are volatile because there’s no central authority to stop them from being volatile. Crypto asset prices then can be assumed to represent investor sentiment more fairly. This hints at what a pure market might look like.
Digital assets and their related derivatives trade on many different platforms in many different jurisdictions, and that limits the power of state regulators to control investors’ behavior.
Crypto derivatives exchanges are an arena in which to see how most investors are capable of self-regulation. Many exchanges offer extremely high leverage, some over 100x, but few investors take advantage of that option, 25X is the common ground.
Market freedom in the more regulated jurisdictions is skewed in favor of the wealthy, with retail investors shut out of opportunities and deep information access for their own good.
There is no market more transparent than the crypto market.
Crypto data aggregators give real-time insight into transaction volumes, basis curves and market bullishness, to name just a few available metrics. And crypto assets move on transparent and open-access blockchains, where anyone can see the state of the network any time.
Most need help interpreting this data, but it can offer insight into investor sentiment by showing investors how long positions have been held, at what price they were acquired and how often a particular address transacts. Imagine having that level of information on traditional assets.
Crypto markets run on the premise that information should be free, while interpretation is worth paying for. This approach embodies choice and freedom, the more information investors have, the more freedom they have to make informed choices.
A Key thing the past year has taught crypto people is that traditional valuation methods no longer have much influence. A new investment paradigm is taking over, it is 1 based on sentiment and narrative.
It represents a new type of freedom, from the tyranny of fundamentals.
When fundamentals such as cash flows and interest rates no longer explain market moves, narratives flourish, giving investors more opportunity to get involved with stories and theories they care about.
Communication technologies support this.
While communities used to be based on geography, now they are based on beliefs as like-minded people easily find one another, reinforcing narratives as well as investment theories and habits.
Here again, crypto markets lead the way.
The freedom to communicate and to invest according to beliefs, long a feature of crypto markets, is starting to change traditional investing.
But, for now this new environment is mainly populated by young retail investors, institutional money is starting to follow their conversations in order to get ahead of their collective influence. Even smart money is starting to embrace the relative freedom of narrative-based investing.
For the inclined: The CFR Crypto Fund Index tracks more than 40 crypto funds, mostly hedge funds, across a variety of strategies. It shows that even as Bitcoin climbed about 1,000% between January 2017 and June 2019, crypto funds gained more than 1,400%.
So, rather than criticizing Bitcoin for its volatility, it should be understood and planned for and appreciated.
With freedom comes risk, always.
Some protections can be put in place, and legal assurances need to be upheld. But wishing away the volatility of crypto assets is to misunderstand the fundamental premise of the concept.
Again, crypto markets are volatile because they are free. There is not more powerful narrative than that.
Have a healthy day, Keep the Faith!