Cryptocurrency has a reputation as the volatility heavyweight champion of the world. Its title is yet uncontested, but change could be right around the corner. Cryptocurrency is still in its infancy compared to traditional, fiat-based assets, and without the seasoned history of gold or the stock market to provide a foundation, it is subject to the whims of news and rumors. This does not, however, deter investors from accepting this high risk in order to fetch the gold at the end of the rainbow.
What is Volatility?
Volatility is best defined as the price fluctuation of a given asset over time. High volatility occurs when massive price swings occur in a short amount of time, and this is true whether the price goes up or down. Bitcoin is a prime example of this because of its price movement. Year-to-date, its price has increased well over 400%, from under $1,000 to its current market price of $4,200. Returns of that magnitude are unheard of with any other asset, lending Bitcoin the reputation of being ‘highly volatile.’ Many traditionalists argue that it is not a store of value by that virtue, but those who have been riding positions from the ground to the moon would offer criticism in return.
Bitcoin vs Stock Market
Volatility is inescapable no matter what investment mechanism is used. Bitcoin has seen its wild swings, yes, but so has the stock market. Remember the 2008-2009 Financial Crisis? The stock market lost over 50% of its value in 18 months, with individual stocks being hammered even harder. While investors were devastated, this pales in comparison to losses seen during the Great Depression, wherein 90 cents out of every invested dollar were incinerated. Not even Bitcoin has witnessed catastrophe on that level. Volatility is not necessarily a bad omen, however. A market without ANY volatility is stale and boring, and even more importantly, not profitable. In reality, high volatility yields high profits or high losses. The trick is positioning yourself on the ride side of the slope to benefit even when others are feeling the pain. Arguably, this is easier with crypto than with stocks. In order to make an educated decision in the stock market, so many things must be taken into account. PE ratios, 52 week high/low, 50 day moving average, 200 day moving average, dividends, pending litigation – all of this must be analyzed and adhered to in order to find the best pick for your hard earned buck. Bitcoin, on the other hand, continually ignores technical indicators and does what it wants. Fortunately, it ‘wants’ to go up.
Crypto markets have been hammered with bad news over the past several weeks. The IRS confronted Coinbase over user information, and results are yet undecided. China moved to ban ICOs, then continued on its rampage attempting to shut down exchanges, and tens of thousands of investors are dealing with locked/frozen funds as a result.Through all of this, the crypto market has been markedly resilient. While it does sit 18% below its all time high of $4980, half of that represents a market correction that began prior to the China news. Typically, on news of this magnitude that affects such a large portion of the key Asian market, a significant correction would be expected – more than the additional ~$300 flux we’ve seen. In light of this recent news and the market response to it, it seems that volatility is falling. Several explanations for this exist, but one asserts itself over the others: capital is leaving the fiat market in favor of digital assets.
Today, Bitcoin’s market cap hovers just under $70 billion USD, even after the recent pullback. Two years ago it was $3 billion. Compare that to the S&P 500, today sitting at ~$22 trillion up from $17.1 trillion. Without crunching those numbers further, it is obvious that the meteoric growth of Bitcoin has vastly outpaced that of the S&P.
So Dump My Stock, Convert to Crypto?
Not exactly. The importance of having a well diversified portfolio is still very much relevant. Bitcoin has seen insane gains driven by new capital entering the market, increased adoption, and some hype, but its future is still uncertain. In the event that it does not realize the potential that proponents expect it to and it does come crashing down, it is best not to have all of your eggs come crashing down with it. Promising ventures can be found globally for traditional fiat investment, and those avenues should continue to be sought after. Supplement any capital investment in the crypto economy with intense scrutiny and independent research and time your market entry carefully to minimize unnecessary risk. Do NOT get spooked by future pullbacks and market corrections because they WILL come inevitably. The only real threat to Bitcoin is governments, and they are embracing the underlying blockchain technology more and more by the day.
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