MINSK, BELARUS — NOVEMBER 22, 2017 : Golden Bitcoins.
Bitcoin is one of the most volatile assets, in connection with than 99% of the holders of the first cryptocurrencies firmly believe, that correctly interpret the concept of «volatility». What if it actually doesn’t work that way, as is commonly thought? Director of Department of Analytics Coindesk Noelle Acheson shared his authoritative opinion about what the volatility of the cryptocurrency is actually and what it depends on. Interpretation is not what you probably expect. So how does the volatility when she are declining, and why the delusion of traders and investors significantly affect their profits? The answer to all questions will be material based on the opinion of Noelle Acheson.
In fact, the volatility is found everywhere, not only in commercial markets. The current political situation (or even our relations in the family) she is also exposed. This abrupt and unpredictable change anything, and in most cases they are negative. Agree, good enough, when stable relationships with their parents suddenly marred by a scandal, and the political situation in the country deteriorated.
Volatility is the enemy of stability, which we usually love. However, in contrast to everyday life on the trading markets, the variability appreciated by the players. Investors hate volatility only as long as a sharp jump in the value of the asset does not make them 10 times richer and the traders happy up to the moment while behind the risks don’t have to pay too high a price. Nevertheless, it is especially common jump scare. When it comes to promotions or tokens, we are subconsciously scared to buy the asset, sorghastrum susceptible to fluctuations in value. This, incidentally, is one of the reasons why, after crypto-winter 2018 dominance of bitcoin began to rise is that the coin Satoshi Nakamoto less exposed to fluctuations.
But, in General, volatility in financial markets doesn’t work that way, as most people think. Almost everyone thinks that the low liquidity leads to high volatility. This is logical, since a relatively small trading volumes to a couple of large orders, the whales can easily penetrate the lows and highs. However, empirical studies have shown that in fact, the high volatility leads to low liquidity and not Vice versa. Players try to compensate for the risk of vibrations, hold down the unstable the asset at. In the case of cryptocurrencies this is a classic strategy HODL — we do not sell coins under any circumstances in the hope that the overall situation is equalized, and the rate will increase.
The confusion affects the crypto-market. Because of the volatility of authoritative experts call bitcoin a high-risk asset, which cannot be considered as a secure investment or to use as means of payment. However, most holders of crypto believe that over time the market will get stronger, it comes more big investors, trading volume will rise, will rise… liquidity and volatility will decrease. But a similar vision — a trap, because in fact price volatility does not, and in fact, based on this faith people build investment strategies and evaluate its portfolio, which invariably affects their profits.
But bitcoin is a special phenomenon with unique characteristics, and to better understand the cryptocurrency market and not to be trapped, it is necessary to consider several interesting hypotheses.
The volatility divided into several types, one of which is the model of hopping diffusion. That’s what we implied in most cases when talking about financial volatility. Price jumps — the standard indicator for analyzing market crypto-assets.
When you think that over time the market will come in huge volumes and there is a high liquidity you expect that liquidity will restrain price hikes of bitcoin. You think the asset will become stable. However, the diffusive volatility is the internal features.
To predict and collect statistics on fluctuations is most often used the standard deviation calculation. Conventionally, the study of the volatility of bitcoin in particular, the company notes that the rate of the first cryptocurrency was between $9000 and $11 000. In the analysis of the captured absolutely all of the value from $9,000 to $11,000, including the most extreme point.
However, this method of calculation exaggerates the role too sharp UPS and downs that happen not so often. For example, within 5 minutes the market went to Keith and worked high order, as a result, the cost of bitcoin has increased by 20%, and then returned to the fluctuations of ±5%. This case will invariably affect the volatility analysis, although the course lasted so just a couple of minutes, because in addition to the kit at this price no longer purchase.
Indeed, with the growing popularity and liquidity of bitcoin, the likelihood of single jumps is reduced, as the market appears more and more «walls» that warrants a large amount, and punching them alone is much more difficult. This is particularly noticeable in comparison with altline: they are less popular and more vulnerable to one-time jumps. Therefore, it is market practice alcaino scheme Panov and dumps the remaining current due to the lower liquidity.
So, with the growth of liquidity of bitcoin reduced the likelihood of one-time shocks, but because of the method of calculation of the standard deviation really, it seems that the volatility is reduced. Whether so it actually? Let’s look at an alternative analysis, which was made by JP Koning. It is not used as the basis of standard deviation and did not rely on mean value and the median, in fact, ignoring the role of the one-time price spikes.
Bitcoin chart volatility for the standard (blue) and median (green) deviation. Source.
From the graph, we see that the volatility of bitcoin over the last 7 years virtually unchanged, though the market came millions of players and the value of the coins and the liquidity increased by ten thousand percent. Really decreased only the number of one-time jumps. But why is this happening? The secret lies in what we mean by the fundamental value of bitcoin.
Markets little «real assets» which would not depend on value of some other. Bitcoin is just one of those. This is not the action and not the bond. He’s like real estate, land or natural resources. In addition, it is impossible to estimate the revenue stream from bitcoin, as reports of incoming and outgoing money is not received, and to calculate at least the approximate profitability is impossible.
Therefore, it is difficult to determine its fair value. Do the same for any asset, which has the transparency of financial investments or specific yield, can even novice analysts. But bitcoin has neither one nor the other.
So what, then, determines the value of BTC? Oddly enough — people. We are with you. Rather, our mood. Bitcoin is worth exactly as much as we are willing to pay for it. This is easy to explain the anomalous increase in the cost at the end of 2017, when the wave of hype even Housewives that do not have a credit card, have to buy the coins like the shares of MMM in 1994.
The closest to bitcoin a real asset — gold. No wonder it is called «digital gold». This precious metal is also impossible to calculate the income stream and its price, primarily due to the mood of the players. And he also experienced an abnormal jump in the cost in 1980, when the and expensive the asset has risen almost three times. That’s just the volatility of bitcoin is still much higher. Just look at this chart:
The volatility of bitcoin (blue) and gold (red) for the last 7 years. Source.
Why is this happening? The case of radical uncertainty. Despite the fact that the Bitcoin network was launched 10 years ago, it’s still new technology, not yet widely adopted. Most people still don’t know what it is. Cryptocurrency and blockchain technology are only beginning to establish itself in the field of education, and then only in the top universities.
Who knows what will happen with all this next. Will cryptocurrencies be used as the main means of payment? What eventually will happen to bitcoin? Whether the world needs smart contracts? Not whether to ban all coins except the state? Too many questions.
Gold has existed for millennia. It is studied far and wide, we know where and how it is used. And if scientists discover some revolutionary way to use gold, of course, it will soar in price. If you have any Magnevist, the market will react accordingly. But all this is unlikely, and therefore the volatility of gold is less significant.
But with bitcoin it’s different. About it daily have written hundreds of news and make dozens of hypotheses. Any background information affects the mood of the market, respectively, and the price of BTC, as well as mood is a determining factor in the value of bitcoin, the uncertainty will continue to affect the price of the first digital coin, until it becomes clear its final potential and scope. This is definitely not happening today and is unlikely to happen tomorrow, so the volatility of bitcoin will remain high even if the market will come millions of new players and liquidity will increase tenfold.
What is the result? Bitcoin will remain volatile forever? No, he will be until then until the answers to the questions posed above. Once the barrier of uncertainty is broken and the role of bitcoin is finally formed. It was then that the coin will cease to be so unstable because of its fair price will be much easier to calculate.
But until then, the course will continue to depend on sentiment and background information. Bullish trend will change to bearish several times a month or even a week, regardless of liquidity and trading volume. Cryptologist just have to accept it: for many years we are accustomed to a similar pattern. In any case, if we want this community to stay, we have no other choice.
The issue of high volatility, highlight two major benefits:
1. Noel Acheson notes that the development of crypto-industry is more and more research and new tools for the assessment of cryptocurrency attitudes and more qualitative predictions. These same tools can be used on other financial markets, to provide more accurate market analysis enabling investors to make more money and take less risk.
2. As frightening nor was volatility, it is the most important component of the huge revenue from the cryptocurrency. If not volatility, it would not be bilinovich millionaires, no one would do anything x2 or X10, did not earn even on daily flath, because even BTC jumps to ±500$ (5%) daily mean flat and calm in the cryptocurrency market. At the same time, it is absurd for other markets, including stock, where such movement would be considered high volatility.
Perhaps the combination of these two components will bring the cryptocurrency trading to a new level, and then we love bitcoin even more. In any case, volatility can not escape. But if the «enemy» cannot be destroyed, it is wiser to become his friend. Agree?