Crypto prices especially vulnerable to market noise

New markets yet to establish a firm footing with investors are subject to price swings. But crypto represents a whole new level of opacity.
Thomas Lee
Senior Writer, Digital Assets Group

Nature abhors a vacuum.

In the absence of hard information, financial markets can react wildly to the slightest bit of rumor of gossip, no matter how inaccurate or far fetched. That’s especially true for cryptocurrencies.

Last year, Bitcoin prices not only plummeted but were particularly prone to extreme volatility. In a way, that’s not surprising. New markets yet to establish a firm footing with investors are subject to price swings.

But crypto represents a whole new level of opacity. For one thing, we don’t even know if the guy credited with inventing Bitcoin actually exists.

Moreover, sophisticated investors, never mind the average Joe, find it hard to understand cryptocurrencies and their underlying Blockchain technologies and how they work. The decentralized nature of the system, in which no centralized institution like government or central banks exercises control, makes crypto seem even more like a black box.

So any bit of noise, verified or not, can really impact cryptomarkets.

“There’s a huge gossip network that actually happens in this space, and I believe it’s those gossip networks that actually end up moving price quite a bit,” Jonathan Nelson, managing director of the Hack Fund, recently told a webinar hosted by SharesPost.

Rumors, unverified news can lead to sharp price declines

For example, Bitcoin prices sharply fell last September amid a report that Goldman Sachs was abandoning plans to launch a cryptocurrency trading desk. A top Goldman executive ultimately denied the rumor.

“I never thought I would hear myself use this term but I really have to describe that news as fake news,” CFO Martin Chavez told the TechCrunch Disrupt conference in San Francisco.

By then, the damage was already done. Over a six day span in early September, Bitcoin prices fell 10 percent to $6,429 from $7,150.

Nelson of the Hacker Fund said a lack of good information can contribute to volatility.

“There aren’t excellent research organizations…actually doing tons of in-depth research on this,” he said. “So it’s really hard to get a sense of who’s buying these, who’s selling, why they’re buying, why they’re selling.”

In such immature markets, even real news can disporportionally sink prices. In late January 2018, Facebook announced that it would ban crypto-related ads from its platform. The decision helped unleashed a fury of wild selling: from Jan. 30 to Feb. 6, Bitcoin prices plummeted 33 percent to $6,932 from $10,496.

Several months later, Facebook reversed its decision. But Biticoin prices barely budged.

Noah Thorp, the lead engineer on SharesPost’s GLASS network, thinks recent disputes over Bitcoin forks (a radical change to the Blockchain protocol that makes previously invalid blocks/transactions valid or vice-versa) caused much of the decline in Bitcoin prices.

“Price is unstable/depressed because Bitcoin miners are at war over different forks,” Thorp said.

News like regulatory updates and criminal hacks seem to only have a limited impact on prices, he said.

Hard to stay calm amid the noise

Regulators, especially in the United States, have refrained from issuing specific rules on cryptocurrencies and sometimes even issued seemingly contradictory statements.

Last October, the International Monetary Fund (IMF) issued a warning that digital money could create “new vulnerabilities in the international financial system.” A month later, IMF managing director Christine Legarde told a crypto conference in Singapore that she supported the idea that central governments should issue cryptocurrencies.

The lack of transparency seems to lead to impulsive, ill advised decisions. Crypto investors should pursue a long term strategy rather than focus on the market noise of the day.

But that’s easier said than done, especially when everyone owns a smartphone or follows social media.

“With other speculative investments, like private equity and venture capital, you can’t check your phone every five minutes,” Jim Smigiel, CIO of absolute return strategies at SEI Investments, told CNBC. With cryptocurrencies, “You’re able to track the minute-by-minute value of it.”

“Looking at something with such high volatility all the time is not conducive to an investor’s mental health,” Smigiel said.