Widowmaker of the untrained trader.
Destroyer of margin trading degenerates.
Equalizer of Illusion.
Whatever you want to call it, Volatility is an omnipresent reality in markets. It is the force of radical price discovery and the gauge of emotional economic stability.
Being the financial/mathematic primitive that measures the degree of price deviation within a set timeframe, volatility is known to be a reliable metric for profiling the risk of an asset.
Typically, the higher the volatility, the harder it is to predict its price, the riskier the asset is considered. The lower the volatility, the more stable the price, the lower the chance of being incorrect, and the safer the asset is considered to be.
Among novice traders, young investors, and mass media, volatility gets a bad rep. It is seen as a sign of indecision and a lack of certainty. In fact, the fluctuations are often demonized as being signs of an inefficient and immature market.
It's not that this is wrong, but it's missing the bigger picture.
Regardless of an asset's maturity, Prices are not constant.
They never were.
They never will be.
Everything from, Bitcoin to Ethereum, and even the oldest asset of all time, gold, fluctuates in price on a daily basis.
Why?
The externalities that humans experience in life are a reflection of their aggregate internal state. The collective consciousness of humanity superimposes its perspective outwards into the markets. Given how variable every individual person's perspective is, there is a constant battle between the sequencing of consumption and the sequencing of production (a fancy way of saying supply vs. demand).
You see, humanity is an emotional creature. It allows its short-term feelings to obfuscate its view of the world causing it to detach from reality. This dissonance results in a bias that deludes us from understanding a very subtle, fundamental truth about finance and economics.
Price does not equal value
Price and value are two completely separate and subjective principles, one rooted in finance, the other in human nature.
Think about it for a second.
If you are thirsty, what's more valuable to you, $10 or an ice-cold bottle of water? Sure the $10 price tag may seem absurd, but when compared to dying of dehydration, it’s a bargain.
Or perhaps a better illustration for the crypto native would be made through the banana desert example.
Imagine you get stuck on a desert island. All you have is a ledger hardware wallet with 1,000 BTC on it and each BTC is worth $1,000,000. But you have no food, no water, no people to talk to, nothing but miles of salty sea and dry sand around you. Would you trade the wallet for all the food and water you will need? (If you said no, welcome to my world, we going to heaven rich AF. Just kidding, we gonna survive MFER.) But in all reality, at some point, you would be willing to give it all away for a banana tree.
Who makes the most money from this knowledge?
Professionals.
Why?
Because professionals have a deep understanding of mass psychology and insights into the true nature of market operations. They see the sharp bidirectional gyrations in price in short time frames not as hurdles to deal with or fear, but as opportunities to take advantage of.
On the side of tradfi we have investor extraordinaire, Warren Buffet. Known for his persistent thesis around value investing. Simply put, the method he used to become one of the greatest financiers in history was by identifying mismatches between the price of stocks and the fundamental value those companies provided to society. He quantified the perceptive emotional illusion of society.
On the side of the crypto markets, we have CZ from Binance. I have incredible respect for the man, but I also understand how he makes money. As an exchange operator, he does not care whether the price goes up or down, all that matters to him is that people buy and sell so that he can collect trading fees. The more emotionally unstable his customers are, the more likely they are to engage in high-frequency reactive/impulsive trading and the more money they bring him.
Nothing is good or bad, but our thinking makes it so.
— William Shakespeare.
How can we expect prices to be stable, if the perspective of people who are pricing things and those that are purchasing them are unstable? (not to mention the tool we use for pricing is also totally unstable).
Besides, while there is definitely an important role for stability in life; if everything in life was stable, humanity would be disincentivized from taking risks and in turn be bored out of its mind.
If things just went up in price forever we would all be living on a planet of investment geniuses. If things went down forever there would be no concept of value preservation.
Volatility is a necessary part of the greater human experience.
This leads us to the next idea, if crypto is the most volatile asset class, and it is the volatility of markets that humanizes economics, then crypto must be the most humane market of all.
Well… yes and no.
Notorious for its ability to rise and fall 10% per day like clockwork, cryptocurrency is the pinnacle of risk. Even though this “high-risk” asset likes to have its price jump around the chart, its value proposition to society has been able to drive the industry from absolute nothing into the trillions of dollars. Bringing life-changing wealth to some, and total devastation to others…
Crypto gets its volatility from a unique mixture of four factors:
1) It is a very young, emerging market sector
2) It began its ascension through retail
3) There is no historic model to quantify its value proposition.
4) Massive manipulation.
Let's take a look at crypto volatility from a few different angles:
The Good
Washing out toxic leverage.
Some institutions become obnoxiously greedy. They allow their manipulative tactics to get the best of them and begin over-extending themselves. While it is definitely heartbreaking to see individual people lose their life savings from these events, it is also healthy to watch shitty institutions crumble.
Giving a chance for people with very little money and an incredible knack for markets to rise from poverty.
Everybody knows by now, the higher the risk, the higher the reward, it's just a simple law of financial physics. The less somebody has to lose by taking a wild chance, the more likely they are to take that chance and the more possible it becomes for them to make a truly life-changing trade/investment.
The Bad
Margin trading in crypto is like juggling flaming knives with a blindfold on.
Like a casino from hell, the crypto markets have financial instruments that allow users to take leverage; some as high as 100x. Obviously seeing this potentiality of returns blinds people from rational thinking. The unknowing end user does not, and will not read the disclaimers, nor will they understand the pain of getting liquidated until it’s too late.
Fortunes have been flushed down the toilet with seemingly random, sharp price movements because of the all too natural desperate desire for people to change their lives in the blink of an eye.
Easy come. Easy go.
The Ugly
Volatility is a game of asymmetric uncertainty that is owned by insiders.
Understanding the power of volatility, large market participants such as hedge funds utilize hyper-complex strategies such as delta-neutral exposure (where they have positions open in both directions and collect funding rates) to protect their own portfolios while manipulating the market to legally steal money from the uninformed.
In the world of crypto, market makers will fake volume, suppress price, trigger false signals, and do anything else that would cause mental harm to the regular participants.
They will create botnets, use anonymous identities, and hire “influencers” to promote their ideas through social media and then rugpull the sh*t out of retail traders, while acting innocent and blaming the volatility of the industry…
Remember friends,
On its own, volatility is neither good nor bad. It is just a tool.
When used in conjunction with extensive knowledge, it is a tool of great wealth creation. When in conjunction with the absence of knowledge it is a dangerous burden.
What people do with volatility determines its role in society.
Stay sane.
Make good decisions.
Never give up.