Crypto Trust Issues — Price Volatility
Part 1 of a series exploring trust issues in blockchain/DLT. You can find the Introduction here.
Crypto Trust Issues — Price Volatility
The first crypto trust issue, which probably resonates the deepest for most, is that of price volatility. Crypto enthusiasts will recall 2018 as the year that the crypto markets hit their current all-time high (ATH) and then came crashing down — which resulted in a crypto winter that blew through the first half of 2019.
On Speculation and Investment
Chapter 10 of Burniske and Tatar’s Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond (2018) focuses on speculation, wherein the authors disregard the usual negativity associated with this term. The authors say that speculation has been integral to market development for millennia — citing evidence dating back to second-century Rome. The authors believe that speculation has its place in the investment world, given that speculators often jump on opportunities quicker than typical investors and thus provide the buy/sell price information that is important to nascent markets.
However paradoxically, after the post-ATH crash of 2018, I noticed that people were blaming the volatility on these very same speculators. At the time, I did not take part in this finger-pointing as I was still unclear about the differences between investing and speculating. Though after some preliminary research, I realized that speculation is viewed as a short-term, high-risk game whereas investing is a long-term, low-risk game. Investing tends to abide by more upfront research on fundamentals and technical analysis, while speculation is based more on feeling and instinct. No matter, upon applying the concepts of investment and speculation to crypto, it was clear to me that most, if not all, of the crypto market, was one largely based on speculation. The limited fundamentals and lack of quality technical analysis (TA) in the blockchain/DLT space had left a void that I believed could only reasonably be filled by speculation.
Another point that I would like to raise is with regard to the relative ease in which anyone with an internet-connected device can participate in crypto trading. As a recent innovation, regulation of the blockchain/DLT sector has been minimal — this is in part due to the complexity of regulating this open-source and globally decentralized technology (however, retroactive regulation has begun, foremost by the U.S. SEC). This lack of regulation has encouraged a sizeable ecosystem to be built-up on the basis of onboarding people — providing them the necessary services to exchange their fiat money for digital tokens. Towards the end of the 2018 ICO-mania, I worked for a company that launched a fairly successful token (at the time). The sheer breadth of nationalities and backgrounds of the people we onboarded made my head spin. I am unsure as to the extent that this ease of accessibility increases volatility but it is certainly something worth considering. For instance, many of the people that we onboarded for the above-unmentioned token, divested soon after launch causing the price to crash hard.
Pump and Dumps
A further issue related to speculation and investment strategies are pump and dump schemes. Antonopoulos recently elaborated on this issue at a meetup in Athens. Essentially, professional investors/speculators (read: people with money) buy large amounts of a given token — with little regard for the underlying technology. These professionals prefer to pay more attention to the fancy websites and slick marketing of these crypto companies, knowing that this, combined with an increasing token price, will attract other buyers to the same token. This is known as the pump. Once the price of the token is sufficiently high, the professionals dump their tokens, earning a decent return, while most others lose. An in-depth review calling for the regulation of pump and dump schemes is found here.
Order Book Size
In the above-mentioned Cryptoassets (2018) there is also a small section entitled volatility (pg.92), wherein the main argument is with regards to order book size and how nascent crypto markets are often rather thinly traded, such that a few buys and sells lead to major price swings. The authors point to Bitcoin as an example of a more widely traded and thus less volatile cryptocurrency, because the larger market size enables a smoother absorption of multiple buy and sell orders. The authors stress, however, that the volatility of Bitcoin is still relativity high, especially when compared to other stalwarts in the non-crypto technology sector.
Stablecoins
One last point worth considering is that of stablecoins, a relatively new class of tokens, created as a solution to crypto volatility (which applies only to the individual stablecoins themselves). Stablecoins are programmed/managed to retain their value — the tokens are either pegged to external commodities such as gold, or to fiat money such as the US dollar, or to other cryptocurrencies. There have also been attempts at creating algorithmic stablecoins, but no successful launches to date. I digress here now on Facebook’s recently proposed Libra stablecoin: An announcement that shook the pillars of this trust-minimizing technology. Many even challenge the inclusion of Libra into the echelons of blockchain/DLT, given that it is permissioned and therefore not open-source/decentralized as per the ethos of Bitcoin. Furthermore, Facebook’s atrocious record on data privacy and a multitude of other scandals requires, if anything, trust-maximization. Libra currently receives the majority of attention in the stablecoin and wider cryptocurrency space. And regulatory boards around the world are once again scrambling to make sense of this new technology, and its latest reiteration as stablecoins.
Conclusion
That crypto is volatile is not news. The technology is new and it continues to attract varying amounts of attention at fairly unpredictable points of time. A certain level of trust is required to participate in crypto trading. Foremost, trusting in the trading strategies (no matter whether you call it investment or speculation) of other participants in the crypto arena. One thing is for sure certain: it is not a good time to buy when markets slope up as immensely as they did at the end of 2017.
Disclaimer: My writing is for entertainment and informational purposes only and does not constitute investment advice. I also own some Bitcoin.
