In one of the strangest moves in finance, bitcoin and the cryptocurrency complex have continued to slide in market value. Within a span of days, bitcoin dropped from its long-established threshold of $10,000 to the time of writing price of around $8,000. What explains this sudden spike in bitcoin volatility?
That’s a question that TheStreet contributor Jordan French attempted to answer. Acknowledging the difficult-to-predict dynamics in the blockchain markets, French wrote:
Bitcoin has a long history of rapid price movements. In fact, much of the crypto parlance evolved to help investors navigate this challenge. These price movements even have their own ominous monitor, a “flash crash,” indicating a sudden and significant price drop.
In this case, bitcoin’s price drop appears to be, to some degree, impacted by margin calls on BitMEX, a crypto exchange based in Seychelles that provides customers with 100x leverage on their investments.
While BitMEX hasn’t commented on the action, crypto data platform DataMash noted the activity.
The corresponding price decrease likely encouraged other investors to sell their positions, cutting their losses before prices fell further.
Still, others in the blockchain space suggested that the bitcoin volatility was due to the underwhelming debut of Bakkt. Stated differently, this was a classic buy the rumor, sell the news opportunity. And some aren’t even pointing to anything fundamentally specific about the cryptocurrencies. Instead, the bitcoin volatility is just noise.
So, what’s the real deal? Here’s my take on the situation:
Bitcoin Volatility a Natural Byproduct of Decentralization
Talk to arguably most cryptocurrency advocates and they’ll bristle at the word centralization. To them, the beauty of blockchain-based assets is that no one entity controls the space (at least theoretically). Thus, no one can impose hegemonic domination over another.
Moreover, I’m not breaking any new ground to suggest that most of these ardent advocates dislike the U.S. dollar. With nothing backing it aside from government promises (fiat), only powerful elites have the ultimate say on the dollar’s valuation.
But as loathsome as the greenback is to many alternative-asset investors, centralization does serve a purpose: relatively predictable stability. Of course, outside forces can severely impact the dollar’s comparative value to other currencies. However, for the most part, the greenback is actively managed to ensure consistent valuations.
Now look at bitcoin. Because of its decentralized nature, only pure market forces (outside of a 51% attack) impact bitcoin’s market value. But is that necessarily desirable? In cases like what we saw over the last several days, extreme bitcoin volatility represents a serious, ongoing concern.
However, this is part and parcel of decentralization. With cryptos, we cannot have our cake and eat it too. Thus, anyone who wants to venture into this sector should do so with this firm understanding.