No matter your investment style or risk tolerance, the current volatility in the bitcoin price can make you sick. At time of writing, the original blockchain reward token is below the $7,500 level, which has acted as a near-term support line.
Virtually every retail investor involved in the cryptocurrency markets are anticipating the next big, bullish wave. The wait, of course, has been incredibly frustrating. Prior to Consensus 2018, the annual cryptocurrency conference, the bitcoin price was on the verge of hitting $10,000. Now, the more likely scenario is that we will test this year’s lows.
Despite these frustrations, one thing to keep in mind is that the bitcoin price volatility could be a lot worse.
Prior to the bitcoin futures market launch, one of the main criticisms of the cryptocurrency sector was that they did not represent truly free markets – investors could only buy blockchain tokens (ie. going long), not sell them short.
But with a futures market, it introduced the concept of hedging. Investors can gamble on the bitcoin price going either direction. It added the fully binary element needed for a legitimate investing market.
However, the key difference between a normal futures market (say, gold futures) and a cryptocurrency futures market is ownership. With the latter, nobody holds anything! Thus, the only thing that people are gambling on is the price fluctuation, not whether blocks of assets will be transferred from one party to another.
Ultimately, what this dynamic indicates is that to manipulate the bitcoin price, you must actually participate in the cryptocurrency market. Therefore, to deflate the blockchain, a purchase is first required, then a subsequent selloff.
To put it more bluntly, you cannot naked-short sell bitcoin. This involves selling short bitcoin that you don’t own, but are selling anyways with the assumption that you’ll make good on the contract; in a way, this is an advanced IOU.
Technically, this can occur in the bitcoin futures market. However, those who are naked-short selling are only doing so against the bitcoin price; at no point are “physical” bitcoins exchanging hands. This forcing of speculators to participate in “real” bitcoin exchanges limits the volatility we see.
It also holds them accountable. If bearish speculators buy bitcoin with the intention of selling, yet if their sales doesn’t drop the price, they’re on the hook. They can’t back out of an IOU by skipping town or any other nonsense.
They buy it, they own it. And they’re responsible for what happens next.