Rehashed - #15 Declining Bitcoin Volatility and Dispelling Money Laundering Notions
Cryptocurrency’s Changing Volatility Profile
Volatility is a measure of the dispersion of returns. In simple terms, it is is the variation in price over a period of time. For example, one asset may have a tendency to swing wildly higher and lower, while another asset may move in much steadier, less turbulent way. Both assets may end up at the same price at the end of day, but their path to that point can vary wildly. Generally the higher the volatility, the riskier the asset.
Cryptocurrencies have always been a highly volatile asset class. It’s this volatility that attracts day traders to the wild west of crypto, particularly when volatility in equities saw all-time lows in 2017. As persistently calm financial markets are not ideal for equities market makers, we saw many traditional equities shops (Susquehanna Group, Hudson River Trading etc.) gravitate towards cryptocurrencies for its wide price fluctuations.
However, for the past four months, the cryptocurrency market has seen declining volatility:
Data retrieved from BitMEX .BVOL Index (based on 30-day TWAP)
As low volatility is often tied to lower volumes, a possible factor could be dampened trading amongst an uncertain regulatory environment. Although volatility has been decreasing, cryptocurrencies remain highly volatile relative to more mature asset classes. For example, Bitcoin has experienced annualized volatility of 60-120%, whereas shares of Apple (AAPL) typically have an annualized volatility of 10-30%.
Although the market has seen less stomachable prices of late, declining volatility can be seen as good for the asset class. If we examine Bitcoin, consistently high volatility is counteractive to Bitcoin’s proposed properties as a medium of exchange or store of value. As the market continues to mature, lower volatility could help Bitcoin realize its utility and potential as a true medium of exchange and store of value.
The Money Laundering Fallacy
There is a prevailing notion that bitcoin and its peers help facilitate illegal transactions. Perhaps it is bitcoin’s association with dark web market, the Silk Road, that invokes images of drugs, terrorist financing and money laundering.
Bitcoin is pseudonymous, not anonymous - an important distinction to recognize. Bitcoin is pseudonymous in the sense that your address is essentially a string of numbers and letters- at face value there is no direct link to your true identity. Yet, if a little digging is done, it can be fairly straightforward to find out the identity of the user behind any given address. For example, when the user inevitably uses a fiat off-ramp to exchange bitcoin for fiat currency, their identity is revealed from the bank account that they cash out to.
My favourite analogy is that it's like writing books under a nom de plume. You can preserve your privacy as long as the pseudonym is not linked to you. But as soon as someone connects you to one of your anonymous books, the ruse is over and your entire writing history is revealed.
For this reason, cryptocurrencies can be an effective measure to trace the movement of money. And the very nature of blockchain technology means that transactions are highly trackable. Every transaction is both public and immutable- once verified, they cannot be deleted or altered. In addition, major liquidity sources are crypto exchanges and over-the-counter desks. They require strict KYC (know-your-customer) checks to mitigate against illegal activity. Concealing transactions becomes very difficult in the crypto-markets if you are unwilling to provide KYC information. Furthermore, there are actually specific agencies that track transactions on the blockchain- Internal Revenue Services in the U.S. has been using bitcoin tracking software for the past couple of years.
In fact, because cash is king in the facilitation of tax evasion and a huge spectrum of criminal activities, sovereign-issued digital currencies could become very good tools in lieu of cash to monitor financial activity. Perhaps it is unsurprising then, that the Reserve Bank is toying with the idea of issuing a digital currency.
This does, however, bring about the privacy issue. To what degree of privacy should the individual be entitled? For this reason, many people in the crypto space are gravitating towards privacy coins such as Monero and Zcash, which implement ring signatures and zero-knowledge proofs respectively to solve for privacy.
In the News
NZ Herald Business Editor, Liam Dann weighs in on the future of fiat money debate.
The NY Times published a Deal Book on cryptocurrency.
Andreessen Horowitz announced the launch of a (USD) $300 million blockchain-dedicated fund.
Facebook reversed its ban on crypto ads - ICOs are still not allowed.
The FBI is working on 130 crypto-related investigations.
3 July - Blockchain Training Workshop in Wellington
5 July - Blockchain Training Workshop in Auckland
27 July - Blockchain Forum Auckland
As always, thanks for joining - see you next week for Rehashed.
View previous issue: Rehashed #14 The State of the Initial Coin Offering - Part 2
View next issue: Rehashed #16 The Rise of the Stablecoin
About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.