Two major characteristics have been marking the Crypto behavior over last one week. First, the Bitcoin price has been steadily declining from high of $9900.96 on May 6th to $8493.23 as the writing of this blog. Secondly, The Crypto Volatility Index (CVI) has also been ranging at about 70% per year during the same period. In fact, this has been a continuation of Bitcoin price demise from a high of about $20,000 in December 2017 to about $8493.23 today, whereas the CVI has increased from about 100% to 130% to about 70% now.
Undoubtedly, such an unpredictable behavior for any financial market raises the question: ‘Is that market rational?’ Are Crypto markets rational?
I am going to suggest that Crypto Markets are arguably far more stable than traditional equity and currency markets.
This is why?
What makes a market irrational? In general, some of the factors that can introduce instability in any exchange markets are:
- Control of the trading commodity by a chosen few – say a Central Bank controlling and manipulating fiat currencies,
- Indefinite and unpredictable supply of the commodity – say a Central Bank pumping money into economy through Fiscal and Economic policies,
- Lack of transparency in a transaction that breeds suspicion, irrational fear, and introduces unreasonableness,
- Political uncertainty, and more importantly natural disasters that can disrupt flow of fiat currencies around the world.
Crypto Currencies are Impervious to These Factors: In general, the crypto markets are not affected by these factors. Bitcoin’s production, distribution, and storage is NOT controlled by any one person or entity. There are only 21 Million Bitcoins to be printed, out of which 17 Million are already in circulation. The supply is known, and predictable. In addition, the Bitcoin Blockchain’s algorithm, as brilliantly developed by Satoshi Nakamoto, has a built-in mechanism that maintains the delicate balance between supply and demand through increased or decreased complexity of the ‘Proof Puzzle,’ to be solved. This prevents unpredictable printing of monies and dumping them in the economy. Crypto transactions are transparent, orderly, and immutable. That brings immeasurable stability, rationality, and stability to Crypto transactions. As Crypto markets are Globally distributed, political uncertainty or even a major Natural disaster in any one part of the world can not induce chaos in Crypto markets.
Crypto Markets are Rational Because they Behave Like any Equity Markets: Crypto markets are behaving more and more like any other rational equity markets. For example, the crypto markets dropped on bad news events, such as, China and India’s tough regulations on Crypto exchanges, or South Korea’s strict guidelines on KYC (Know Your Client) process. That’s what the rational markets do. They lose value on bad news. On the other hand, even these and other bad news, such as, SEC’s crack down on Initial Coin Offerings (ICOs) have not driven the Crypto markets over the precipice into oblivion.
The reason for Crypto market’s stability is the fact that there is positive news that have supported these markets. For example, Venture capital firm Andreessen Horowitz has proposed a separate Crypto Hedge Fund (CHF), and Goldman Sachs has just formed a new Crypto Fund Group (CFG). Nasdaq is mulling over a crypto exchange. Crypto markets also gained some respectability last December, as CBOE and CME introduced Bitcoin futures. Addition of Bitcoin futures into equity markets infuses liquidity into the market making them less prone to vagaries of miners and traders alike. Also, if one evaluates the life cycle of Bitcoin and Block chain startups, Cryptos are behaving rationally just like any other growth industry. At the inception- between 2013 and 2016, the VCs invested Billions of dollars into Crypto and Blockchain startups. As these start ups have innovated; consolidation, mergers, and even failures (e.g. Mt. Gox) have occurred in the industry. Accordingly, the Crypto prices have traded sideways, recoiled to much higher levels, and have lost market values significantly. These ALL are traits of a market behaving in a rational manner.
One of the most neglected aspect of Crypto Currency is the fact that each coin represents a technical innovation – Blockchain based – artifact to execute a function. For example, Bitcoin was initially devised to replace the P2P fiat currency exchange system and is founded on Bitcoin Blockchain technology. Similarly, Ethereum and Ripple are supported through their own Blockchain technologies. There are Blockchain funds, Blockchain ETFs, and hedge funds that cover practically every crypto coin in the Crypto Universe. All of these impart credibility, stability, and liquidity to Crypto Currency markets making them behave rationally.
Crypto market is still in its infancy. Hence, wild price fluctuations, and volume are expected. However, the currency fundamentals, and the underlying Blockchain technology are innovative, unique, and more importantly sound rendering these markets rational.
For someone, who is just starting in these markets – these wild price fluctuations may sound irrational. However, that is exactly how a new financial instrument, or product is expected to behave – mystifyingly though rationally.
At Platinum Trading Institute (PTI), our traders attempt to uncover the mystery surrounding the Cryptocurrencies, and help you take informed decisions about trading them.
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