A bitcoin logo displayed on a smartphone with stock market percentages in the background in this illustration dated April 26, 2021.
Omar Marques | SOPA pictures | LightRocket | Getty Images
So you want to play in crypto and become a millionaire overnight? Get ready for more days like Wednesday.
Bitcoin fell as much as 30% to around $ 30,000, according to Coin Metrics. Ether fell more than 40% in less than 24 hours and broke below $ 2,000 at one point. Both gained significant ground again at the end of the day.
However, this is a given in the world of cryptocurrency trading. Huge attempts and equally drastic falls. Over and over.
“Massive retracements are always scary, but seasoned investors tend to see them as a buying opportunity,” said Mati Greenspan, portfolio manager and founder of Quantum Economics.
Both crypto and market experts tell CNBC that this is the new normal for investing and traders should just get used to it.
Bitcoin’s volatility has to do with many things.
For example, on Wednesday the news that China is cracking down on banks that conclude crypto transactions, as well as the tailwind from Tesla’s decision to stop accepting Bitcoin as a form of payment undoubtedly helped fuel the carnage among digital currencies. The entire crypto market, courtesy of Elon Musk, was likely slated for correction even after weeks of record highs inspired by tweets.
But volatility is also the price Bitcoin investors pay for their limited supply and the lack of a central bank to control that supply – precisely the traits that proponents consider valuable.
Part of what makes Bitcoin valuable is the fact that it is scarce. There are 18.7 million Bitcoin in circulation, which is nearing its maximum threshold of 21 million.
New Bitcoin is created as a reward for miners who use their computing power to verify transactions in the decentralized network. Over time, these rewards decrease in size, so each new block completed earns fewer miners than it used to.
As a result, the supply of Bitcoin is completely inelastic. “An increase in demand cannot lead to an increase in the supply of Bitcoin or an increase in the rate at which Bitcoin is spent,” wrote Ria Bhutoria, former research director for Fidelity Digital Assets.
The value of Bitcoin is also derived from the decentralized network. There is no central authority authorized to intervene in the Bitcoin market.
“No central bank or government can intervene to support or prop up markets and artificially suppress volatility,” continued Bhutoria. “Bitcoin’s volatility is a compromise for a distortion-free market.”
In addition, Bitcoin is still very new.
“”[It’s] She is only 13 years old so she doesn’t have a great trading history, “stated Peter Boockvar, chief investment officer at Bleakley Advisory Group.” While a company that went public yesterday has no history, a company can at least be valued in terms of business prospects, earnings, and cash flow. “
Since Bitcoin is still an emerging asset class, it is still in the pricing phase. “”[It’s] the most volatile asset life cycle, “said Mike Bucella, general partner of Blocktower Capital.
“Bitcoin has clearly established itself as a new form of value, but the final value has not yet been defined,” continued Bucella. “This information gap is suitable for a dynamic or a technically driven market without new information.”
The path to real pricing is often fraught with seismic price volatility, but Bhutoria points out that the alternative is artificial stability that can lead to distorted markets that can collapse without intervention.
Bucella expects today’s trading volatility to repeat itself.
“There will be many periods, as we have seen today, when a negative news cycle has affected the technical level (and momentum) of BTC price – and these will be exacerbated as market participants start leveraging.” continued Bucella.
What happened today is pretty typical: spot selling breaks a key level and leverage is liquidated, resulting in a more dramatic sell-off than the market would otherwise indicate. Bucella says the same pattern has been going on over and over again for the past decade, and he believes it will last until we reach a mature level of acceptance.
Ultimately, “high risk, highly rewarding” is usually the rule for investing, and this is especially true for Bitcoin.
“All investments involve risk and, like stocks, crypto is volatile,” said Noah Perlman, Gemini’s chief operating officer. “Bitcoin is still a young asset class, but one of the best in the last decade.”
Playing the long game is crucial. “As in any market, crypto investors will see more consistent results with a longer time frame and a diversified portfolio,” Greenspan stated.
Bitcoin’s volatility also has a kind of “halo effect” on companies exposed to the cryptocurrency.
Tesla, which has a $ 1.5 billion stake in Bitcoin, fell around 2.5 percent on Wednesday. Microstrategy, another company that holds a large amount of Bitcoin for its corporate coffers, ended the day 6.6% lower, and Coinbase, the newly public crypto exchange, which specifically warned in its S-1 that it is prone to volatility Price movements of his cryptocurrencies fell by 6%.
For Bucella, however, that type of volatility is a gift that most fund managers would ignore in traditional markets. “As a fund manager with adequate risk management, infrastructure and instruments, this volatility presents tremendous opportunities,” said Bucella.
Regardless of your risk tolerance, experts say volatility won’t always be that bad.
Bitcoin trading is no longer dominated by retail buyers. Professional money managers and corporate America flooded the market last year, and they’re just getting started. As more and more institutional investors use Bitcoin, it gives cryptocurrency a newfound legitimacy and helps reduce reputational risk. It also creates more stability overall.
“With the increasing adoption of Bitcoin and the development of derivatives and investment products, the volatility of Bitcoin may continue to decrease, as it has in the past,” said Bhutoria.
And like long-time value investor Bill Miller in one CNBC interview Earlier this year: “One of the interesting things about Bitcoin is that the higher it goes, the riskier it gets.”