Boltzmann, Volatility, and Cryptoassets
Generally, the markets for cryptoassets lack crucial information, analyses, and metrics. Today — movements in price are predicated on some combination of technical analyses, sentiment scoring, and news. While the most sophisticated investors rely on the robustness of a crypto asset’s underlying economic design, these analyses mostly amount to qualitative perspective on a given project. The industry still lacks a common set of quantitative metrics with theoretical underpinning.
Until these metrics are developed, animal spirits will rule the markets, govern price, and ultimately prevent the space from maturing. At Boltzmann, we seek to develop a formal set of analytical frameworks and metrics that reduce the Pricing Model Uncertainty associated with this historic asset class to the benefit of all market participants. In a series of posts we will discuss the efforts of our research at Boltzmann. Here we begin with a formal investigation of the problem confronting crypto asset investors.
High Pricing Model Uncertainty — Low Adoption:
The lack of standard metrics, methods of analysis, and performance benchmarks for protocols, networks, tokens, and teams means that valuing any given crypto asset is unusually difficult. This difficulty is more formally known as Pricing Model Uncertainty (PMU).
PMU is a sub-component of the Theory of Rational Beliefs, which empirically suggests that intelligent economic agents may exhibit differences in beliefs even when they have the same information. These differences in beliefs about future price are further exacerbated when the models for processing information with respect to price are weak or have not been formalized, as they have not been with cryptoassets.
In context, if ten Bitcoin holders process a singular event, each individual will come to a separate conclusion for what a Bitcoin is worth. By contrast, if ten credit risk free bond holders receive the same piece of information about the future rate of inflation, each individual will come to the same conclusion for what that bond is worth. Not only do individual investors not understand what information is relevant to the price of Bitcoin, but they also lack the models and frameworks that tell them how relevant information may be interpreted with respect to price.
All cryptoassets suffer from an extraordinarily high level of PMU, which is evinced in the markets by price volatility. The result of high PMU is that investors in cryptoassets are forced to play an event-driven benchmarked trading game where price overshoots are the rational result of investors following the dominating price trend, whether that is up or down. Given the persistence of this condition, traders will continue to speculate on news and drive prices wildly in both positive and negative directions. Unmediated, this dynamic will hinder the broad scale adoption and utility of token-enabled blockchain networks. High PMU is particularly concerning for cryptoassets that function primarily as stores of value. Unless the issue of PMU is addressed, the space will suffer to mature and reach broad scale adoption.
At Boltzmann, we are developing a service that formalizes the metrics and analytical frameworks employed to value cryptoassets. Over the coming months, it is our intent to systematically quantify disorder of the Web 3.0 universe. We will share our insights here to lower PMU and benefit all market participants.
