We all forget that Bitcoin does not yet have a globally accepted story

Everyone has a different understanding of volatility.

It's like different people see the same news headlines and have their own understandings, which has a lot to do with their personal experiences.

Volatility refers to drastic and unpredictable changes, which usually has a negative connotation. In the financial markets, most people will instinctively avoid assets that fluctuate drastically.

But on the other hand, investors love volatility when they can make money, and traders also love it when they see the risk premium that volatility creates.

Bitcoin is a highly volatile asset. The following chart shows how Bitcoin volatility changes over time over a one-year period:

When using standard deviation, we find that the volatility of Bitcoin is decreasing, which seems to indicate that the Bitcoin market is maturing.

But if we remove the extreme data and ignore the impact of outliers (a common method used in statistics to better reflect reality), the volatility of Bitcoin has not changed much in a year, and it is still a highly volatile asset.

Why is Bitcoin volatile?

Bitcoin is one of the few "Real Assets" currently. Its value is not related to other assets and only depends on its own attributes.

Just like gold as a "Real Asset", Bitcoin does not have the concept of cash flow or income, which makes it difficult to value it. Analysts cannot value Bitcoin through the so-called fair value of cash flow.

Many people think that Bitcoin is a pyramid scheme, but the value of Bitcoin depends entirely on consensus.

Currently, the value of Bitcoin is equal to what the market believes it is worth. In the absence of traditional fundamentals, most investors are actually guessing what other investors will think, so concepts such as mainstream capital, main funds, and market makers are flying around.

The same is true for gold, which has no cash flows and whose market value is driven primarily by consensus.

Comparison of volatility between gold and Bitcoin

But why is gold less volatile? Because of the certainty of gold.

In financial markets, fundamentals do not determine prices; the market's description of fundamentals determines prices.

At present, Bitcoin is uncertain. People who invest in Bitcoin are not sure about its fundamentals. If you ask ten people, you may get 20 different answers, such as world currency, digital gold, faith, blockchain MLM, etc.

Gold has existed for thousands of years, and market sentiment towards it is relatively stable because there is a good global consensus on the story of gold.

As it stands, Bitcoin’s story is not stable, and a stable story means its volatility is unlikely to abate any time soon.

So until Bitcoin has a story that everyone believes in, market sentiment will be very vulnerable to changes in various events, and prices will change accordingly.

But no matter which direction its story goes, the Bitcoin market will continue to amplify in that direction.

This reminds me of our article from last week, BTC vs. ETH: A Triumph of Positioning.

In the industry, most people take it for granted that the positioning of Bitcoin and Ethereum is very clear, but when it comes to the trading market, its high volatility shows that even the most liquid assets in the industry lack a story of universal consensus. In other words, it may have a story that everyone recognizes at a certain time, but this story is not strong.

In the past year, there seem to be no new stories emerging, and everyone relies on old stories to recharge their faith. I don’t know whether this is good or bad.

(over)

References:

https://www.coindesk.com/what-bitcoins-valuation-says-about-its-volatility