The Tribune

ACTIVTRADES WEEKLY

By Ricardo Evangelista

www.activtrades.bs

Traders of bitcoin are used to sharp price action, such as the one experienced during the first weekend of December, when the digital currency lost around 20 percent of its value. Such drops in value would normally see investors pulling their hair out, but many holders of cryptos barely care, believing that regardless of everything else the asset will eventually recover and continue to reach for virtually limitless heights. Such investors are driven by an almost messianic faith in bitcoin’s significance and potential, seeing in it as an encapsulation of several virtues, which include holding the key to a fairer and more transparent future and, unlike much-maligned fiat money, being immune to the influence of obscure powerful forces.

Considering its popular appeal and legions of fans, many will be surprised to learn that 95 percent of all available coins are held by only 2 percent of the existing wallets and, despite the spectacular price action of the last 12 months, fewer than 20 percent of existing bitcoins were traded during that period. Another peculiarity of this market is the large number of exchanges where trading occurs, creating a fragmented market that is conducive to amplifying volatility. This means a relatively small movement in one such venue can trigger a significant price oscillation across the entire system. Finally, the large number of derivatives contracts, allowing the use of leverage, and which are based on the prices of the underlying asset, in this case bitcoin, account for transactions that are five times’ larger in volume than those placed on the coin itself.

However, despite the idiosyncrasies of this marketplace, in essence the value fluctuations of cryptos tend, to a large extent, to be determined by dynamics similar to those that move more established markets. The events of December 3 provide a good illustration: The price of bitcoin dropped by around 20 percent of its value, a movement that mirrored (on a greater scale, due to the reasons highlighted in the previous paragraph) a generalised switch to risk aversion in the financial markets. The Nasdaq index lost 2 percent on that same day following the release of US employment data.

As the unemployment rate dropped to 4 percent, the lowest level since the beginning of the pandemic, expectations that the American Federal Reserve will hike interest rates earlier than previously expected took over the sentiment of investors. The result was a decline in the demand for risky assets, which affected technology stocks but had a particularly strong impact on crypto currencies. This dynamic was intensified by the emergence of Omicron, a new variant of the coronavirus, whiuch saw investors seeking the protection of safe haven assets, fearing new lockdowns and the halting of the economic recovery coinciding with the withdrawal of monetary stimulus.

Volatility both attracts and repels traders, depending on their profile and risk appetite. Still, as industry heavyweights become increasingly involved in the cryptos’ market, volatility will tend to decrease. Also, authorities around the globe started looking at this asset class with more attention, meaning that in the medium to long-term enhanced regulation will also contribute to greater price stability. But, in the meantime, with the withdrawal of central banks’ stimulus looming ever closer on the horizon (remember 2013 and the taper tantrum?) volatility is likely to remain high and crypto traders may be in for an abundance of trading opportunities.