Bitcoin crashed over 20% from its all-time highs. And it took the whole crypto market with it. Although this may be painful, it’s never a loss unless you sell.
There are many ways to cope with volatility, but here’s how I choose to deal with it.
How volatile is Bitcoin?
But, before anything else, first, let’s take a look at how volatile Bitcoin really is. The following statistic is quite interesting.
As you can see on the chart below, Bitcoin’s volatility is about 7x higher than the S&P500’s. To put it another way, a 12% move in BTC would be equivalent to a 1.7% move in the S&P 500 index.
Equally important is to look at implied volatility, which captures the market’s view of the likelihood of prices changes. According to Skew, that likelihood is 4.7% daily.
Here’s why Bitcoin is so volatile
First, Bitcoin is only 12 years old, and it’s still in the early days in the competition for hard-money market share.
Every new technology goes through high volatility in the beginning. So treating a Bitcoin investment like venture capital makes logical sense because it’s much younger than other major assets.
Second, Bitcoin is open for trading 24/7. Unlike trading stock and commodities, the Bitcoin market never closes. Imagine if it didn’t trade every second of every day, but you could only exit it five years after you invested. Like with any venture capital investment, you’d mark the value of the asset at cost and wait patiently for five years. Anyone who has treated the investment this way has seen exponential returns.
And finally, Bitcoin is massively traded on margin, and people are paying for it with borrowed money. Some exchanges allow their uses to take up to 100-to-1 leverage. As a result, the automatic selloff triggers a domino effect that leads to massive liquidations when the price goes down. And given the volatility of Bitcoin, 100x leverage is always a bad idea.
The simple way to understand Bitcoin volatility
Bitcoin has always been volatile, but only relative to the dollar. In some ways, you can argue that the dollar is highly volatile against Bitcoin as it slowly works its way out of the financial system.
In other words, it doesn’t matter whether the price is $3,000, $30,000 or $300,000. No fiat price tag matters because all paper money eventually returns to its intrinsic value, zero.
As Tim Draper, Founder of Draper Associates, likes to say, “one Bitcoin is still worth one Bitcoin, but over time all the other currencies are slowly falling away.”
Another way to understand Bitcoin volatility is through the lens of inflation. If you live from paycheck to paycheck and watch Netflix as your hobby, you don’t need to worry about inflation. However, if you aspire to buy a house, have three kids, and live well in 10 years, you have a significant inflation problem to solve. In effect, your aspiration determines your fear of inflation and that determines your fear of Bitcoin volatility.
The question is, how high can Bitcoin get?
Michael Saylor, CEO of Microstrategy, recently argued why Bitcoin will eventually become a $100 trillion asset, nearly 100x upside from here. And regarding the volatility, he pointed out,
“Bitcoin will be volatile, but it will go up forever.”
Of course, no one knows the future, so no one can say whether it is going up, down, or circles. But the fact is that Bitcoin has always bounced back.
Takeaway
Simply realize that volatility is a necessary evil, and it is the price you pay for the extraordinary performance you get. It’s a feature, not a bug.
If you make volatility disappear, you make the opportunity disappear.
