Bitcoin is a perfect example of extreme volatility. Lets break it down to the basics.
Need to Know: Finance
Finance and Economics are two similar fields of study, but they make important distinctions that any dark net market professional should know. First, both fields define volatility as the measure of how quickly an investment, asset, or currency changes with time. Financiers typically quantify volatility as the standard deviation of daily returns for a given period of time. This information is valuable for derivative trading because it is used to calculate moving averages and trends. Volatility is also a strong indicator of the amount of risk an investment has.
The more “liquid” a market, the more volatile is can become. Liquidity is a financial concept quantifying the degree to which an investment, asset, or currency can be bought or sold quickly on the marketplace. For example, the stock market contains large portions of liquid stocks, but most investors don’t buy and sell stocks everyday, making a portion of the market not liquid.
Need to Know: Economics
Macro-economists, or economists that study large scale or government economics, use volatility figures to highlight macro-level economic trends and patterns. When a market experiences volatility spikes that means people are buying and selling a good much more rapidly and in bigger swings than is normal. Macro-economists believe that when this phenomenon occurs on the stock market it’s a measure of market fears and anxiety among investors.
What this means for you
- Volatility and Price are related
The 30 day Bitcoin volatility index currently stands at 3.47%. For comparison, the 30 day gold volatility index and the 30 day US Dollar volatility index stand at -.70% and .95%. Bitcoin surges are real, and there’s no sign of them going away. This means that simply holding Bitcoin has a higher financial risk than holding a different currency.
When volatility is higher, price changes are much more drastic. To shield yourself from risk you shouldn’t hold BTC if the volatility index is above 1%, because your risk profile is higher than simply holding most major currencies.
- Bitcoin prices are shaped by demand, not supply
There’s a finite amount of BTC that can ever exist, unlike printed fiat currencies. Since supply is finite, changes in price can only be determined by what people are willing to pay for them.
Arbitrage is the buying and selling of an investment, asset or currency for profit due to change in price. While volatility makes strategic arbitrage of a currency like Bitcoin impossible, the rapid fluctuations in price have made it possible for Bitcoin exchanges to experience rapid growth. This is because when an individual wants to sell BTC they are a price taker, meaning they have to accept whatever the market is willing to give them.
Exchanges make their money by buying that BTC at the exchange price and charging a flat rate fee for market making. Market Makers then turn around and sell the BTC at the exchange price, and charge a purchasing fee for holding the risk to make the trade possible. The more BTC and individual price taker wants to buy, the more expensive it becomes, as the market maker charges marginally more for the marginally higher risk.
- Watch your wallets
To avoid holding unnecessary risk, don’t hold onto Bitcoin you aren’t actively using. While Bitcoin might appear like some mystical artifact of the future, clear observation of the direction of finance shows this isn’t the end all of currency. It’s a regulation nightmare, massive investments often flop and fizz out, and it doesn’t appear to be stabilizing any time soon.
- Don’t put money in Bitcoin you can’t afford to lose
I’m not your financial manager, and I don’t care if you make or lose any money. With that in mind, I think the best rule of thumb is to not put money in Bitcoin you can’t afford to lose.
Dark net markets are miniature versions of bitcoin exchanges and banks. They charge market-making fees for vendors to open accounts, for users to remove BTC from market circulation, and by exit scamming, which taxes the markets heavily for holding significant financial risk.