The anguish experienced by traders worldwide during the $20,000 to $6,000 slide further proves that recently experienced losses matter more than gains. The financial media and many traders forget that 18 months ago the price was $1,000 and then in the fall of 2015 the price was $200.
Jonny-come-lately traders / investors were eviscerated by the recent moves. To make matters worse, the volatility collapsed alongside the price. For crypto, this is deadlier than white wine and painkillers.
But what about adoption? One of the major facets of Bitcoin preventing further adoption is its high volatility. In a pure Bitcoin economy, how can people trade Bitcoin against real goods if its value violently fluctuates? The underwater trader laments that the market just doesn’t get the “fundamental” value of this new transaction network. Well, what transaction network’s monetary token do you know increased 20x in value in under one year? None. Therefore, the driving force is not about current utility but intense speculation on future utility.
Changing the way in which humans use money is an extremely long and difficult process. This process by its nature must be chaotic. Money and the means by which it is handled is personal and sometimes religious. If you tell a society that tomorrow things will be done differently than how they were done over the past 200 years, there will be an intense reticence to change. A violent upheaval is necessary. Therefore, if Bitcoin is to be used in any productive manner, the period leading up to this new epoch must be extremely volatile.
Bitcoin is a call option on a new monetary system. The most important option pricing input is the underlying asset’s implied volatility. As the above chart illustrates, the realised 30-day annualised volatility crashed alongside the price. When volatility returns, the price will go higher.
The nuclear bear market of 2015 started in January when the price broke $300. For the next 10 months, the price traded between $200 and $300. While that is a 50% range, the daily movements were very slight.
Without volatility, many traders, investors, and market commentators wrote off Bitcoin. Why should one care about an asset that has crashed over 80% from its recent all-time high, and has barely moved since?
Traders returned to the market because the volatility re-emerged. If Bitcoin can gyrate 100% in annualised volatility terms in a 30-day period, then quick gains can be made. The FOMO “investors” who believe they can change their lot in life with little effort and in little time took us from $200 to $20,000. There were not many things that fundamentally changed about the adoption of Bitcoin in real commerce from 2015 to 2017.
The path to parity will not begin in earnest until volatility rises materially. People need to be excited again. 10% pump & dumps in one day will bring back the good times. The real questions are what catalyst will start the party again, and how long will it take.
During the 2017 bull market, the effect of global macro events on Bitcoin was forgotten. For 2H2018, a global macro event will have to prove that Bitcoin is a safe-haven asset. In 2015 Greece almost told Frau Merkel to do one, but chickened out at the crossroads. Bitcoin responded positively when the market believed Greece could actually liberate itself. If a similar type scare happened later this year, would Bitcoin regain its safe haven status?
With the Fed, ECB, and BOJ effectively flatlining or outright reducing their balance sheets, cracks in the financial markets will show later this year. Money printing has never led to prosperity in the long run, and when you shut off the tap the ghosts and ghouls of the financial markets will play.
Thankfully the mainstream financial press loves talking about crypto. The personalities of the leading figures are larger than life. Even at Bitcoin $6,000 and Ether $400 a whole cadre of individuals are generationally wealthy, and are making interesting life choices the media can’t stop covering. In 2015 no one was watching, in 2018 everyone is.
In order to prove their prescience, MSM outlets will fall over themselves attempting to call the bottom in Bitcoin. The foolish many who believe these pundits actually can divine the future will attempt to knife catch. Many will fail, but if enough try, some will succeed. These successful retail punters will be paraded on the airwaves as trading gods. This will further increase the FOMO, volatility, and price appreciation.
Nothing goes up or down in a straight line. I still haven’t seen enough pain and anguish to believe we are done bloodletting. In true Bitcoin fashion, the price will go to the level no one thinks is possible and rebound faster than traders can work up the nerve to BTFD.