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The day bitcoin becomes less volatile is the day mass adoption begins. Or will mass adoption minimize bitcoin volatility?
This is one of the most popular debates in our space as market participants attempt to speculate on when the volatile bitcoin price action will become more fluid. Those who know me know my position on the subject: mass adoption should eventually smooth the volatility curve and price swings of bitcoin, but this adoption could significantly increase volatility in the short term, as the ecosystem expands. continues to adapt to the influx of new market players.
As the Bitcoin ecosystem grows and evolves, new players keep entering with different characteristics from each other which can disrupt or even stress an ecosystem accustomed to a different reality for so long.
The journey of Bitcoin price volatility
Some of the lowest levels of volatility, in fact, occurred during the early adoption phase (2013 to 2017) of bitcoin, when the market cap was below $ 20 billion and the network was dominated by early adopters. believers in a market reserved for buyers. Then suddenly volatility hit with a sell off that rocked the world in 2018 and pulled many people “out of the market”.
But what happened before the sale that triggered this event? A lot has been said about it, but few approaches have recognized a key event that took place a little earlier, in December 2017: the introduction of the first bitcoin futures product, which started trading on the Chicago Mercantile Exchange.
It was an event which, for the first time, created a new reality. The ability to short sell bitcoin on a large scale. In other words, the ability to sell bitcoin that you’ve never owned before (even though that bitcoin has never been real, but rather a price tracker).
This was the first expansion of the Bitcoin ecosystem, which countered the earlier reality of a buyer’s market.
The growing popularity of bitcoin as a massively adopting asset class triggered the creation of the futures market and the creation of a new type of market participant, the short seller, which led to a sale we all remember.
Source: TradingView
Going forward, as bitcoin entered a new market cycle, the pain of the 2018 sell-off removed most of the dynamic players from the system and allowed maximalists to regain the majority makeup of the network.
Something that led to the gradual rejuvenation of prices until mid-2020, when bitcoin first became the coolest kid in town and mass adoption began to appear as a potential reality.
A deeper dive into the causes of Bitcoin price volatility
But, before we get into the present, let’s take a look at just how volatile bitcoin was as it moved towards the CME list, the ease of pricing, and the return to relativity for people outside the network.
Source: Bloomberg Terminal
Bitcoin was quite volatile, some would say, as the network braced for mass adoption. But how does that compare to the price action from mid-2020 to the present day, when a record influx of market players joined our network and mass adoption started to kick in?
Source: Bloomberg Terminal
The record influx of new market participants has led to record volatility in the network, volatility that does not seem ready to leave the system yet. “Why?” you might ask. “Haven’t we always believed mass adoption would bring balance to the system? “How is it that bitcoin, with a market cap of $ 100 billion, $ 300 billion or even $ 1,000 billion, is more volatile than bitcoin with a market cap of $ 20 billion?”
The answer is simple: market players now have different purposes and purposes than they had at the early adoption stage, and the network suffers a little shock as it tries to absorb growth, similar to the one in the network. acne on the face of a teenager as well as on his body. becomes that of an adult.
Bitcoin with a market capitalization of several hundred billion dollars has many new players. Players with different roles and beliefs, with maximalists now representing a much smaller slice of the pie. The ecosystem has evolved from a buyer’s market that initially hosted long-term investors, to embrace dynamic traders and speculators, homeowners and liquidity providers, lenders and a host of other new roles that are in fact very necessary for the long term. eventual goal of mass adoption, but that has brought extreme short-term volatility as the network tries to adapt to the new and ever-changing reality.
The importance of risk management
All of this, as one question continues to dominate the market: How can we minimize volatility on a network that has gone from infant to infant, but still has a long way to go before it is. fully developed?
The answer is simple: risk management.
Managing risk from an individual perspective is the most important help each of us can offer bitcoin to keep growing and accepting new members with lower volatility and price fluctuations. softer.
When it comes to risk management, rule number one is to understand your risks. But before we understand them, we actually need to recognize them.
“Risk denial refers to the cognitive means of developing an adaptation to risky behaviors by rejecting the possibility of suffering a loss. “-Peretti-Watel
“It’s not what you don’t know that is causing you trouble. This is what you are sure it is not. -Mark Twain
What if the cumulative total of bitcoin positions around the world were not based on random outcomes, but rather on scenarios known before the position was established?
What if the liquidation of this leveraged position could have been avoided?
What if a miner’s profit was locked in for a year or 70% of your wallet value was secured?
Then confidence would dominate the market and the next sale wouldn’t have been as bad as the last.
Risk management is a vote of confidence in bitcoin.
Why? Because confidence is derived from known results and known results are a result of risk management.
Risk management is the answer to extremely volatile fluctuations and smaller sales. The time the downturn is not detrimental to our wallets or the savings of our lives is when liquidations will be avoided and panic sales will take hold.
The moment when each individual manages their risk is the moment when price normalization will be achieved and confidence will be gained in the whole market.
But how do you approach risk management?
To begin with, risk management begins with placing positions and executing trades. Or by simply avoiding a situation of over-indebtedness over which you have absolutely no control.
Risk management is about ensuring that we do not engage in a trade that, if it goes wrong, will threaten our financial well-being and that of our families.
Risk management happens when you put a stop loss on your leveraged position instead of doubling or hoping that prices will return to their original level.
Risk management happens when you quickly realize that you are the one in the wrong, not the market, and adjust your exposure accordingly.
In a more moderate approach, risk management can be done through derivatives markets, when you buy a put option in order to establish a maximum loss scenario or a minimum gain. Or simply when you sell futures contracts for part of your physical position to protect your portfolio against nearby volatility and potentially adverse market conditions.
Like anything else in life, risk management should work as a damage aversion mechanism, not as a solution to consequences. Our goal should always be to prevent our house from catching fire, not to put out the fire when it is too late.
This is a guest article by Anestis Arampatzis. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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Sources 2/ https://bitcoinmagazine.com/markets/managing-bitcoin-price-volatility The mention sources can contact us to remove/changing this article |
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