Why Crypto's Current Whiplash is Different

The current whiplash in cryptos is driven more by bets on the changing economic landscape than by the asset class itself, despite the extreme volatility in digital assets over the years.

Starting with the record-longest US federal government shutdown, the see-saw in global markets has shown a clear trend - uncertainty.

No asset class has remained immune to the wild moves, with traders divided on almost every aspect of key drivers in markets.

While the divergence in crypto returns compared to traditional assets from a year ago is clear, the trading levels themselves are a trend story. The wider adoption of cryptos is a reality. Crypto products have expanded exponentially, even as naysayers' warnings continue to reverberate across the world.

Investor confidence in crypto seems to be at play despite the flash crash since early October after Bitcoin's new peak above $126,000, which was called a wild fantasy bet not too long ago.

Wild Swings in Fed Rate Path Bet

More importantly, the historic swing in Federal Reserve rate cut bets over the past month is almost unprecedented.

Usually, the Fed would want to have its signal for the next moves to global markets clear and stable. But bets on a Fed rate cut in December have whiplashed violently. before the rate cut last month, December meeting was a live event, with over 80 percent chance for a 25 basis points easing.

That changed almost immediately after Fed boss Jerome Powell countered those bets and at the press conference after the Fed meeting in October said a December rate cut is not a "foregone conclusion."

He also emphasised the deep divide within the FOMC, and the waved off the intense political pressure from the White House to cut rates.

When the U.S. administration goes after the Fed's independence, markets are bound to react. The biggest hit from that were on cryptos, despite a friendly White house and favourable policies.

Investors had bet that the next leg up in cryptos would come from Fed rate cuts, with low interest rates feeding into bigger investments into digital asset for better returns.

The lack of data due to the shutdown and Powell's comment that the Fed is "driving in the fog," wasn't lost on markets.

Those combined factors led to unprecedented whiplash in Fed rate path bets. In just a month, Fed rate cut bets went from over 90% to a low of 30% and back up again over 75%.

Remember, that is completely the opposite of what the Fed wants.

But a deep divide among policymakers itself is driving those wild moves.

So, the crash and pullback in cryptos since October is anything but a mere reflection of the uncertainty, rather than a confidence change in the asset class itself.

Why the Volatile Nature?

Still, over the years, cryptos have been volatile in general. They have been subject to sudden and massive price swings within a short timeframes.

For financial strategy and portfolio diversification, understanding Bitcoin's volatility and the factors that cause it is essential.

A number of recent studies have investigated the impact of several financial and economic factors on Bitcoin's volatility.

However, the findings from the expanding body of research on Bitcoin's volatility vary significantly, and a definitive consensus on the key factors influencing it remains elusive.

Previously, explanatory variables on certain relevant theories and uncertainty about the true specification for crypto volatility were used to understand the see-saw.

Now, statistical studies using multidimensionality of the factors behind Bitcoin volatility show the supply versus demand dynamics combined with financial and macroeconomic drivers have had a bigger say in recent times.

Although Bitcoin's volatility has been steadily decreasing as the market has developed, it has still been quite high compared to other assets. There have been periods of sharp price drops and periods of very large price hikes.

During its initial phase, from 2009 to 2013, Bitcoin's value was modest and largely influenced by speculative activities.

Significant price fluctuations driven by speculation and insufficient oversight were evident during its major surge in 2011, which experienced an astonishing 8,000% rise followed by a rapid decline.

A lengthy downturn in the market ensued after the 2014 Mt. Gox incident, coinciding with a period of maturation and significant market disruptions from 2014 to 2019.

The market began to show signs of maturity with enhanced exchanges and proactive regulatory efforts, yet it remained quite volatile.

Despite the persistent high levels of absolute volatility, a noticeable trend emerged indicating a decline in volatility over this period.

The years 2020 and 2021, during the pandemic, volatility was at its worst: Even though Bitcoin's price fell sharply during the market crash of March 2020, it quickly recovered thanks to massive government stimulus programs and reached new highs in the end.

Annualized volatility peaked in 2021 at around 97.3%, indicating substantial variations over the timeframe.

Since 2022, there has been a noticeable decrease in the absolute daily realized volatility, with each year showcasing progressively smaller peaks - for instance, 87.9% in 2022 and 65.7% in 2023.

The approval of spot Bitcoin ETFs in 2024 fostered a more stable, albeit still volatile, market environment, indicating a clear trend towards institutional adoption.

Other Assets vs. Bitcoin Volatility

When assessing Bitcoin alongside more traditional assets such as gold and conventional stocks, it is evident that its volatility remains significantly greater.

Gold and global equities exhibit volatility levels approximately 3.6 and 5.1 times greater than cryptos.

Although a 2% daily fluctuation in stocks is regarded as significant, a 5-10% daily shift in Bitcoin is quite normal.

But, it's noteworthy that the market volatility of Bitcoin has been comparable to, or even less than, some individual mega-cap tech stocks like Nvidia or Tesla, particularly as the market has experienced growth.

Bitcoin remains an asset characterized by significant risk and potential reward, influenced by its finite supply, market perceptions, and evolving regulations, despite a reduction in its volatility over time.

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Kaia's Path to Mass Adoption: Blockchain in Everyday Apps

This week, Takatoshi Shibayama hosts Dr Sangmin "Sam" Seo and John Cho from the Kaia DLT Foundation. They discuss the merger of Kakao and Line to create the Kaia blockchain, the integration of stablecoins and DeFi into their messaging apps, and the strategies for attracting Web2 users to Web3. The conversation also covers the potential of stablecoins in cross-border remittance and the user journey from fiat to digital assets.

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