Crypto Long & Short: Crypto Markets Are Volatile Because They’re Free

Bitcoin, fiercely embraced by libertarians, has been hailed as the key to financial freedom. Decentralized innovation on borderless computing platforms has given rise to new paradigms of thought and creativity, and the global collaboration has both lowered financial boundaries and supported individual opportunity. We all know that, in order to live peacefully with each other, some freedoms need to be curtailed. The progress of civilization has revolved around finding the balance between too little and too much, with the pendulum swinging from one extreme to the other and knocking things over in the process.

Rules have also evolved to dampen volatility, because of the damage wild swings can do to portfolios and livelihoods. You may remember during the GameStop fluctuations that trading on the stock was frequently suspended because of strong market moves. The New York Stock Exchange, to pick one example, has market-wide circuit breaker procedures in place to either halt certain stocks temporarily or to close the entire market if established thresholds are crossed. Investors are powerless to do anything about this.

These rules evolved because volatility is seen to be bad. We see this anti-volatility bias throughout the mainstream coverage of this week’s crypto market rout and recovery. But for crypto investors who have been in the market a while, volatility is not a bug – it is a feature, and not just because of the potential of outsized returns. It is also a feature because it highlights the market’s relatively unique freedom. Crypto markets are volatile because there’s no central authority to stop them from being so. Crypto asset prices, therefore, can be assumed to represent investor sentiment more fairly. This hints at what a “pure” market could look like.

Not all of the swings this week were the unfettered expressions of market opinion. Much of the volatility came from the forced closing out of long and short positions in crypto derivatives. Leverage had been building up on offshore crypto derivatives exchanges, and the market swings were exacerbated by harsh liquidations as margin limits were breached again and again. But these liquidations, messy as they may have been, also represent market freedom. Digital assets and their related derivatives trade on many different platforms in many different jurisdictions – this limits the power of gatekeepers to control investors’ behavior. But crypto derivatives exchanges are an intriguing arena in which to see how most investors are capable of self-regulation: Many exchanges offer extremely high leverage, some over 100x, but few investors take advantage of that irresponsible option. Most of the damage done this week was to 25x positions.

Crypto Long & Short: Crypto Markets Are Volatile Because They’re Free, CoinDesk, May 24