Opportunity in Volatility
Owning cryptocurrency can feel a bit like riding a roller coaster. It goes up, it goes down, and just when you think things are calm, round again we go. The volatility is framed by the media as the bogeyman: every time crypto goes up solidly, the underinformed and poorly researched journalists in mainstream media vociferously protest “BUBBLE” at the top of their lungs, and anytime crypto corrects you’ll hear at similar volume “BUST” with mock horror.
Recently months have certainly seen some hairy times for crypto. Between the 26th October, and the 8th January, bitcoin climbed a phenomenal 200% to an all-time high, to then correct, over a fortnight, by 27%. Much nail biting ensured, but frankly after such stratospheric gains one would expect some correction — indeed we have, at the time of writing, bitcoin has recovered around 13%. Frankly, I would still be thrilled with this return over a 3 month period over the high street returns! Whilst I concede the risk profiles are light and day, it does illustrate why many retail investors have been diversifying into bluechip cryptos.
But how this volatility occurs, and how we should conceptualize it warrants further discussion. Corrections are an expected part of any ecosystem, and crypto is no different; personally, I cannot see crypto volatility going away any time soon. Indeed, declines in excess of 10% have happened nine times in the last two years. More interestingly, they are often followed by periods of strong growth — there is a solid trend after the March 2020 price crash that helped bitcoin reached its record highs of $41,900.
Let us also not forget that the fact that crypto shows poor correlation with traditional assets is exactly its appeal. Further, it is not fair to suggest that traditional markets are immune to price swings; indeed, the major Western stock markets all lost c. 30% almost overnight, in March last year, as the impact of coronavirus became clear to global investors. The dual prescription of tighter regulation and increasing institutional investment is often proposed as the fix. Whilst I am not convinced this has eliminated volatility in other markets, a Goldman Sachs exec claims that institutional investor is “key” to ironing out bitcoin volatility. I think this is a simplistic viewpoint; Fidelity estimates 30% of institutions are exposed to crypto already. More importantly “whales” are taking advantage of buying in the dip, as data analysis shows that a number of addresses with at least 1,000 or more bitcoins increased last week — an indication that large institutional buyers are taking advantage of a short term correction. I felt the analysis of Delphi Digital, was more nuanced, seeing recent corrections as “shaking out profit takers and ‘weak hands’ is necessary for BTC to make strides upwards”
In conclusion, I concur with legendary investor Bill Miller who sees volatility as “the price you pay for performance”. Dacxi is one of the few crypto exchanges intended for those seeking to build wealth through crypto, and are interested in medium-term holding, rather than trading. For most of our platform users, any dip is a buying opportunity and no more than a blip on a positive trend over a 12–24 month period. Hold your nerve, don’t panic sell, and have “dollar cost averaging” as your mantra! I also want to give a nod to the other cryptos that suddenly seem significantly calmer, particularly Ethereum which increasingly is stepping out of bitcoin’s shadow. Whilst crypto is not for those who cannot endure some volatility, the growth over 2020 and 2021 is a solid argument in favour of the pain being worth the gain!
Adventures of a unicorn is a business blog documenting the daily life of tech startup in hypergrowth. Dacxi is a unique crypto business in the crowdlending space.
Originally published at http://adventures-of-a-unicorn.com on January 25, 2021.