{"id":16765,"date":"2021-04-30T22:00:00","date_gmt":"2021-04-30T22:00:00","guid":{"rendered":"http:\/\/ci0281ef9750002568"},"modified":"2025-01-30T12:31:26","modified_gmt":"2025-01-30T12:31:26","slug":"why-is-bitcoin-so-volatile","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/why-is-bitcoin-so-volatile","title":{"rendered":"Why Does Bitcoin\u2019s Price Make Random, Sudden Downward Moves?"},"content":{"rendered":"
<\/div>

Mimesis Capital: Inside The Event Horizon, Report #15<\/h2>\n

Why Does Bitcoin\u2019s Price Make Random, Sudden Downward Moves?<\/strong><\/em><\/p>\n

A common knock on bitcoin is that it is \u201ctoo volatile.\u201d<\/p>\n

There is no denying that bitcoin is a volatile asset. Its price action supports this conclusion on nearly all time frames (including minute, hour, daily, and yearly).<\/p>\n

However, volatility isn\u2019t necessarily a bad thing. In fact, volatility creates opportunity.<\/p>\n

Over long time horizons (4+ years), bitcoin\u2019s volatility has been mainly to the upside. Using this longer time horizon helps to eliminate the noise and focus on the signal.<\/p>\n

Volatility and return can be assessed using something called the Sharpe ratio, which measures risk-adjusted return. The Sharpe ratio is the result of dividing the asset\u2019s return by its risk\/volatility over a 4-year HODL period.<\/p>\n

<\/figure>\n

Bitcoin\u2019s Sharpe ratio has been higher than that of every other asset class throughout its entire existence. This is one of Wall Street\u2019s favorite financial metrics, and it screams, \u201cBuy bitcoin,\u201d as it shows that the return of holding bitcoin has more than compensated holders for its historical level of downside volatility.<\/p>\n

Large, Quick Downward Moves<\/h2>\n

Why does bitcoin have such large, sudden downward price moves? What is causing these massive corrections in such short times?<\/p>\n

<\/figure>\n
<\/figure>\n
<\/figure>\n

Unlike equities (stocks), which tend to be traded aggressively on earnings days (days when companies\u2019 performance and future guidance fundamentally change), bitcoin tends to be traded aggressively on seemingly random days.<\/p>\n

This strange phenomenon tends to confuse traditional commentators and journalists as they struggle to find any news piece that could have affected the price so drastically.<\/p>\n

Eventually, someone finds some possible explanation, and it immediately gets circulated as a result of confirmation bias.<\/p>\n

Examples:<\/p>\n

    \n
  • \u201cBitcoin fell 10% because of the Biden tax hikes\u201d<\/li>\n
  • \u201cBitcoin fell 10% because of a (false) exchange inflow of 10,000 BTC\u201d<\/li>\n
  • \u201cBitcoin fell 10% because Yellen is pushing for an 80% capital gains tax on crypto\u201d (fake news)<\/li>\n<\/ul>\n

    Although a small number of individuals may be placing buy or sell orders based on one-off news stories, they likely aren\u2019t the sole driver of the sudden bitcoin price crashes that we regularly see.<\/p>\n

    In reality, many people retweeting and spreading the news that bitcoin\u2019s price crashed because of X are simply being \u201cFooled by Randomness<\/a>.\u201d<\/p>\n

    Leverage Liquidations<\/h2>\n

    Although X may be one of many catalysts, the large downward moves are often driven by excessive leverage in the system.<\/p>\n

    This may confuse some people because by definition, for every buyer of a futures or perpetual swap contract, there must be a seller. However, the prices of those contracts change based on the market\u2019s balance between longs and shorts.<\/p>\n

    For example, a funding rate is charged that helps exchanges to keep the perpetual swap price in line with the spot price. If the general market sentiment leans long, then the funding rate likely results in longs paying shorts every 8 hours. This is why bitcoin futures contracts trade in contango<\/a> during a bull market.<\/p>\n

    \n

    #Bitcoin<\/a> eliminates imbalance as soon as it appears. This is a feature of a monetary system with a fixed inelastic supply and variable demand. It is the polar opposite of how the legacy system functions, which allows imbalances to grow causing fragility and long term instability. https:\/\/t.co\/4QHVEluSlK<\/a><\/p>\n

    — Parker Lewis (@parkeralewis) April 23, 2021<\/a><\/p><\/blockquote>\n