In a recent report from Business Insider, several Wall Street hedge funds asserted that they solved the bitcoin volatility problem. How? Through the anointment of their presence.
Okay, I’m being somewhat facetious, but the broader message remains on point. Wall Street firms claim they stabilized bitcoin due to their rising investment in cryptocurrencies. Prior to their involvement, cryptos featured wildly unpredictable trading. Sometimes, market valuations represented paradigm-shifts from one day to another.
But “thanks” to the Wall Street alpha dogs, the input and influx of large money from relatively singular sources have cut down the volatility. Plus, these hedge funds have evidence to back them up. According to Danny Kim, head of crypto-trading technology firm SFOX:
“Before institutional firms were actively trading crypto or heavily involved (before 2018) bitcoin price differences between exchanges varied as high as 4.5%.” Now, according to SFOX’s website, price differences are no more than one tenth of one percent.
Certainly, that’s a significant improvement. Not only that, cryptocurrencies have transitioned from a vague, almost dangerous investment into something much more mainstream.
But did Wall Street really catalyze this stability and acceptance in bitcoin?
I can see why major hedge funds are motivated to take credit for bitcoin innovations. After all, Wall Street doesn’t really care what people invest in, so long as they’re getting a cut.
That’s one of my problems with their assertions. In prior years, several hedge funds slammed bitcoin because it presented an existential crisis for the traditional financial system. Only when they realized they could profit from bitcoin did their tune change.
But the biggest issue is that Wall Street is wrong. While price variances between crypto exchanges may have flattened, the cryptocurrencies themselves are still incredibly volatile. True, bitcoin as the leading blockchain reward token isn’t nearly as wild as it once was. However, that still doesn’t take away from the fact that is incredibly volatile when compared to traditional long investments.
That’s not a reflection of cryptocurrencies, but rather, the underlying international economy. Although the benchmark financial indices claim stability, it’s also artificial stability (ie. the plunge protection team). When financial engineers lose control of the markets, they roll over, similar to what happened in 2008.
You’re not going to see too much of that in the crypto markets. Instead, what you’ll witness are daily price corrections as the sector seeks true market value. This can result in incredibly wild trading, but it reflects true demand, not financial engineering.