Bitcoin and The Forces Required to Stabilize It’s Fiat Price – A Pricing Primer
If you have a pulse, you’ve most likely heard about Bitcoin and its volatility even if you’re not familiar with the cryptocurrency market. It’s brought up a lot in the media, openly criticized by famous investors like Warren Buffet and parodied on an episode during the 5th season of the hit HBO show, Silicon Valley.
The character Gilfoyle has an obnoxious heavy metal alarm that blasts in the office every time the value of Bitcoin drops below a certain price point so he knows to stop mining it. The alarm went off too many times to count during the episode and it annoyed everyone in the office.
If you have money in crypto and you are trying to “hodl,” you know also know the pain of Guilfoyle’s alarm a little too well. The price moves up and down and then up again. It’s all over the place right now, but does it have the capacity to stabilize in the future?
What makes Bitcoin so volatile?
What makes Bitcoin so volatile is a few things:
- Lack of regulations
- Market manipulation
- Emotional crypto traders
- Low volume of transactions
Some market manipulation tactics you can see any given day on crypto exchanges are
These market manipulation tactics are much harder to carry out when there is a significant amount of money and more transactions in the market.
The more participation there is in the market, the more difficult it is to manipulate it successfully. It’s like the penny stock pink sheet world which is also very volatile for the same reason, a lack of trading volume and regulations (more than crypto).
The NYSE and Nasdaq exchanges aren’t so easy to manipulate because of the sheer amount of daily transactions and amount of money in the market.
How do we get more money in Bitcoin/crypto?
The only way to fix this low volume is with a significant amount of institutional money brought into the crypto market. If this happens more conservative, retail investors will follow their lead. Which will eventually lead to a more stable Bitcoin price.
But how can financial institutions justify putting their money into something so volatile?
They can’t put billions of dollars of their clients’ money into Bitcoin it’s irresponsible. Institutions like to hedge their bets and minimize risk while still turning a profit.
It’s objectively not a good bet to put a significant amount of money into something so volatile and pray that you entered the market at the right time. So it’s the classic chicken, and the egg dilemma and Bitcoin’s value remains volatile.
On the flipside, financial institutions are also at risk of losing their clients’ money if their fiat currency value significantly diminishes in the future. If the fiat currency crashes then they lose their clients’ money that way as well.
How do they hedge their bet and minimize their risk against this risk? The answer obviously is to invest a percentage of their portfolio into Bitcoin.
Are Futures Contracts the Answer?
Even though financial institutions knew they ran the risk of losing their holdings due to a fiat currency crash, there was still a minimal chance of institutional money legitimately entering the cryptocurrency market until December 2017. Their outlook started to change in December 2017 when the CBOE and CME began selling futures for Bitcoin.
This new development was and still is a game changer for institutional funds because they can now hedge against Bitcoin by shorting it (they make a profit if the price drops) as well profiting when it rises.
All of the sudden financial institutions can start responsibly participating in the crypto market. The only way they could participate beforehand and make money was to buy Bitcoin, “hodl” and hope for the best in a volatile market. It’s a well-known fact that hope is not a good strategy for investing other people’s money.
The introduction of Bitcoin futures into the market will propel more institutional money into Bitcoin. This uptick in the crypto market will happen because if a position in a futures contract isn’t closed out, the commodity goes directly to the contract holder. So this means exchanges will be brokering the sale of Bitcoins to institutional funds a little bit more each day.
As more exchanges start offering future contracts around the world, the more institutional funds will enter Bitcoin. This activity will eventually infuse enough money into the crypto market, and this increase in activity will begin to stabilize the price of Bitcoin eventually.
Bitcoin isn’t stable yet, because it takes time for a volatile market to stabilize. However, if things keep trending the way they are today, it’s not entirely impossible for the price of Bitcoin to stabilize.
If you enjoyed learning about Bitcoin’s volatility, please check our blog as we launch https://hybridblock.io/ the worlds most robust cryptocurrency eco system
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May 31, 2018 at 11:04AM
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