Crypto, You re Drunk. Go Home. Why Is The Market So Volatile?

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Cryptocurrency has its detractors. Its naysayers. Its outright haters and nasty people. Crypto can be a dirty word in some circles and in others, it isn't seen as a "real" investment. I think the biggest problem these folks have with the Crypto Markets is its volatility. Who the heck wants to put money in something that's potentially next to worthless one day, and moons another day? How could something with the word "Currency" in it be so... topsy turvy? Who would want money that does that?

There's an old joke that goes around, and I have heard many different iterations of it:

A Boy goes up to his dad and asks him, "Hey Dad, can I borrow a Bitcoin?"

The Dad looks at his son, taken aback, "8500 dollars? Why in the world do you need 3250 dollars?"

The Dad then throws himself through a window:

I think this makes the point succinctly. The Market is volatile, and that would scare any would be conservative investors away. Ain't nobody got time fo' dat.

Or do they? I think the biggest reason why these markets are like this is because they share something in common with another well known - but extremely volatile market that every financial person is familiar with; Commodities.

It's More than Magical Money. It's a Commodity.

I had to dig up some research, find a few articles with opinions on the matter. What can I say? I'm just some dude on the Interwebs trying to find my way. Don't take this as financial advice. Would you go to your Dentist to get your brakes checked? The answer is No.

Having said that, please stay with me. Hey, did you know Lean Hogs are something that's on the market?

 

You can essentially place a bet on hogs, and what their price will be. That's crazy. When I was a kid, before I learned about what Futures are, I had this image in my head of guys in Wall Street trading a bunch of pigs for other pigs and money, like some sort of surreal mixture of White and Blue Collars. Yeah, I was a lonely child.

ANY CASECommodities are among the most volatile of the traditional asset classes, and there are some good reasons for this.

 

They Are Not Too Terribly Liquid

Liquidity, for those of you who don't know, is basically how fast or easily an asset can be brought to the market and sold. Commodities are infamous for this, and crypto often is as well. You would figure for crypto, liquidity would be high like Forex, but in fact in often is not. This is due to a multitude of issues such as exchanges, adoption in the market, and so on. It is seen as a big problem.

Good Ol' Fashioned Supply and Demand

Economics 101. If you have yourself a particular amount of a commodity or widget or whatever, this - along with the demand - determines the price. In other words, if one compares the in-flows and out-flows of Bitcoin, we arrive at a particular price. The problem is that At any given moment, it is difficult to determine what in the world is affecting people buying and what is making people sell. Naturally, large "Big Box" miners are wanting very much to take their mining rewards and get them sold at the highest price as quickly as possible - which in turn affects the supply side and assists in lowering the cost. So, like many other assets we see this natural cycle of bursts in price and drops. Like commodities, it is hard to predict exactly what's gonna happen in the short term on any given hour or day. But fortunately, we can get a pretty decent general idea of where the price will go over a longer period of time. Why? Adoption and Halving events.

As a quick review, a halving event (such as with bitcoin) occurs when the block rewards miners receive is reduced. This happens at particular times and we are right on the heels of the next event which is supposed to occur sometime in May. When this happens, the amount of in-flows from those miners is going be a lot less than it was before, and if adoption increases, we will see a rise in price action. This is of course,  the absolute basics. There are a lot of factors that must be considered to have a general idea of where the price can go. But, for this guy's money, the Stock to Flow Model pretty successful in gauging the general trends of the market. It's based on simplicity, no Sorcery needed for this magic.

Now, there is a lot of discussion on how exactly this goes down. Some might disagree, while others are onboard. Time is the great arbiter of this discussion. In any case, because of the supply and demand, we see that day-to-day trends are extremely hard to understand. Bitcoin might be drunk and you might not know where it's gonna go next, but it seems lie it always makes it home.

That's the opinion at least. Some will say I'm chock-full of sh*t. That's okay.

 

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