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Bitcoin volatility is spilling over to traditional markets

Feb 6
2 min read
• Crypto markets are once again in turmoil. Bitcoin is down around 45 % and ether around 55 % over the past six months. Extreme, but not unprecedented.

Bitcoin volatility is structural. Crypto markets are prone to violent crashes and spikes because major exchanges combine trading, market-making, and clearing. During downturns, this creates highly pro-cyclical mass liquidations into falling markets. Reported liquidation figures are only one trade per second, so they massively understate what is really happening, by a factor of hundreds (or thousands, during flash crashes).

• Crypto has not matured despite its age. The market is fragmented across more than 10,000 tokens, with apparent demand overstated by extensive double-counting of total value locked in decentralised finance.

• Crypto markets are driven by fads, not fundamentals. Each wave delivers rapid gains followed by inevitable crashes. First it was initial coin offerings, then non-fungible tokens, then exchange-traded funds. Last year it was digital asset treasuries like Strategy. Now it is the tokenisation of real-world assets. The pattern never changes, only the label does.

• Gold and especially silver have recently shown levels of volatility never seen before, driven by their tokenisation and trading on crypto venues. The same is beginning to happen with tokenised shares and company bonds. Once assets are traded on public blockchains with crypto-style clearing, they inherit the same structural flaw as bitcoin: liquidation cascades that turn modest price moves into flash crashes --- and these are increasing in both amplitude and frequency.

• What would actually stabilise crypto is not “more rules”, regulators are ignoring the elephant in the room! Crypto needs independent clearing with serious, risk-based margining, as in traditional markets. Without that, crashes are not accidents. They are inevitable.

 


 
 
 

8 Comments


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Sep 18

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The correlation between crypto assets and broader financial indices is certainly accelerating. As markets become more interconnected, exploring community-driven digital utilities can be a helpful way to manage your own financial data and tracking tools without relying on centralized, volatile platforms.

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© 2022 Carol Alexander

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