The Gift of Crypto Volatility

Earlier this week, I chatted with a professional “Active Trader” who had spent his career taking advantage of short-term price movements on highly liquid markets like stocks, currencies, options, and derivatives.

I suppose “Active” may be a slight misnomer here. This particular individual was currently on a very extended, very unwanted garden leave.

A year and 2 months ago he’d taken a package at his firm (which eventually imploded) as they sought to thin their ranks of traders — and he’s been looking for work ever since.

He explained that there were fewer and fewer roles for Active Traders in equities. Besides the rise of Algorithmic High Frequency Trading as a more efficient solution (leaving little room for the vagaries of human errors) his gripe was obvious:

“It’s impossible to make a real living as an active trader in an equity market where there is literally no volatility anymore.”

Apparently, 2017 was the least volatile year in the equities market since 1964. Just 6.8% volatility, which is nary enough for an active trader to make any sort of living.

But then there’s the crypto market — which completely redefines the concepts of volatility:

• Holy Smokes! XRP goes up 33% in one day— worthy of but a single raised eyebrow because its price went up 28,000% in 2017 alone;
• At the end of December 2017 BTC’s price downshifted by $3,000 in a single day, eventually touching $9,000 in early 2018, but then over a few more days rises again to $12,500.

Here’s the simple truth:

For equities, the Bears and Bulls are cycles of years or months. For cryptocurrencies, the Bears and Bulls are cycles of days and hours.

That shouldn’t be considered a weakness; the bear/bull rhythm of cryptocurrencies — the crushing pace of its volatility — are its strength. Massive swings are a benefit.

It speaks to those who appreciate risk; who are fearless in the face of fluctuations (FFF); who couldn’t be more bored by a stock ticker dribbling up and down pennies at a time.

This is why cryptocurrency is the gift to a whole new generation of investors: the Millennials.

The Millennials have yet to have their opportunity to make riches. They never saw 5% interest in a savings account. They’ve been squeezed and burdened by student debt. They missed the real estate boom; hell, they came of age during the housing crisis which soured them greatly to government, control — and of course, equities.

Sure, Millennials gave equities a shot. They started by shunning in-the-flesh wealth managers for robo-advisors like Wealthfront (why not let the computer try to make $ while you go hang gliding?); for those who wanted a hands-on high, they gamified their day-trading habit with Robinhood, an app that lets you buy and sell equities commission-free as if it were monopoly money.

But it was still equities. And equities didn’t move fast enough. Equities require patience. Who has time for that?

In September 2017 — when Bitcoin was still at $4600 — Charlie Bilello, director of research at Pension Partners noted that “Bitcoin and U.S. stocks don’t move together on a daily basis. They are basically independent of each other and I don’t see any fundamental reason for bitcoin and stocks to have a negative relationship.”

On January 16, 2018, gold coin sales increased fivefold, the same time cryptocurrencies were crashing 40%. And that very well may be indicative of an inverse correlation between the two investment vehicles.

For those who trade in gold, this is an opportunity: to swim in the same pool of volatility as cryptocurrency. While gold has always had some volatility, this provides a new sense of relevance —gold was the bracelet you bought or a hedge against oil or bonds. It was lumped in with housing and savings and traditional equities. Now it’s in the spotlight along with cryptocurrency.

If I were an equities trader — maybe even one who has been out of work — I might long for the day when equities correlated, inversely or directly, with cryptocurrencies to provide them the much needed volatility boost.

The volatility of cryptocurrencies. That is the gift.