Bitcoin’s ‘flash crash’ shatters crypto illusion

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Meanwhile, the Fed’s abrupt abandonment of its belief that high inflation rates were “transient” further contributed to the sudden malaise.

The VIX Index – which measures volatility and is sometimes referred to as the “fear index” – had broadly stagnated below 20 percent through November, but suddenly surpassed 30 percent last week.

No one would reasonably accept Bitcoin in exchange for real goods or services when the price can change 20% in an hour.

Dips in the value of crypto assets have reflected this broader volatility and risk aversion, but amplified it, in spades.

There are a number of possible reasons why the crypto movement has been so much more violent than that of conventional assets, even those, like tech companies, whose high earnings multiples make them more susceptible to changes in appetites for. the risk.

The first is that the market, even when it was at $ 3 trillion, remains relatively small and illiquid. The US stock market is valued at over $ 50 trillion and has significant liquidity.

One function of the low levels of liquidity in the crypto markets is that price movements, in either direction, will be magnified by any increase in trading activity. While the increased involvement of institutional investors and hedge funds in the crypto markets this year is a long-term positive for their credibility and depth, it brings derivative and leveraged exposures to smaller markets, immature and not particularly transparent.

It appears that there have been significant levels of derivative and leveraged transactions in cryptos over the past week – many Bitcoin futures positions were abruptly closed as the price entered a tailspin.

Under these circumstances, as the sale of riskier assets accelerated, it is not surprising that the crypto asset market was hit much harder than that of conventional investments. Mainstreaming cryptography is a double-edged sword.

Crypto investors are, of course, used to wild rides and seem to view every drop in their value as an opportunity. Bitcoin, it must be said, is still up almost 60% since the start of this year. Last week’s experience, however, underscores the uselessness of cryptocurrencies as alternatives to fiat currencies as a medium of exchange.

No one would reasonably accept Bitcoin in exchange for real goods or services when the price can change 20% in an hour. It is a means of speculation, not of exchange.

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It also doesn’t work as a diversifier when it needs to be.

While under calmer conditions there appears to be little correlation between crypto assets and other major asset classes, whenever there is turbulence and prices fall in the stock market, they move away. synchronized way – but the movement is almost three times greater than that seen in the stock market.

The broader market continues to weave its way through the implications of the Omicron outbreak and the sudden change in the Fed’s stance. US inflation figures are due on Friday and will provide new data to the Fed and investors.

Until a clearer picture of the pandemic’s outlook, economies, and monetary policy settings emerges, investors will likely remain aware of risks and volatile markets.

For crypto investors, that could mean going through wilder rides like the one that happened at the end of last week and built up so explosively over the weekend. For traders this would provide opportunities and for investors it would generate anxiety.

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