Crypto moves more violently than almost any other asset class. Swings of tens of percent within a week are no exception, and sometimes such a move plays out within a single day. For a wealthy investor the question is therefore not whether crypto is volatile, but why crypto is so volatile, and what those fluctuations mean for the role such an investment can play in a portfolio.
The answer lies in the nature of the market itself. Crypto is a relatively young asset class, traded on a market that runs day and night, sensitive to news and sentiment, and one in which leverage plays a large role. These factors reinforce one another. The fluctuations are, after all, not a malfunction in the system but a feature of the asset class.
A thin market reacts more sharply
Price arises where supply and demand meet. On a market with many participants and deep order books, large transactions are absorbed effortlessly, without the price swinging far. Relative to equities, bonds or currencies, the crypto market is still small and less liquid. A sizeable order can therefore move the price noticeably, and relatively small flows of money make themselves felt more quickly. Trading is moreover fragmented across countless platforms, without a single central exchange that bundles all liquidity. What would be noise on a deep market quickly becomes a swing here.
News, sentiment and leverage amplify the swings
Crypto reacts sharply to news about regulation, macroeconomics, technology and the entry of large players. Because a central determination of value is absent, sentiment weighs heavily. What moves the bitcoin price in the short term is often expectation rather than underlying change. On top of that comes leverage. A great deal of trading takes place with borrowed money, and when the price turns, positions are forcibly closed. Those liquidations amplify the very move that caused them. Round-the-clock trading does the rest, for there is no closing bell to force the market to rest, and in the thin hours of the weekend moves turn out larger.
Volatility comes with a young asset class
High volatility is often read as a shortcoming, yet it is inherent to a market that is still finding its place. An asset class a little over fifteen years old has no broad consensus on value, and that uncertainty translates into movement. The same dynamic that makes sharp rises possible causes equally sharp falls. As markets mature, with more institutional participation, deeper liquidity and regulation such as the European MiCA Regulation, volatility has historically declined gradually. It has not disappeared, and no prediction about its further course can be drawn from this. Anyone who invests in crypto simply accepts volatility as part of the proposition.
The Callisto Capital approach
Callisto Capital does not try to predict prices, but deals in a structured way with the volatility the crypto market inevitably carries. As a Dutch registered investment fund under the AIFMD-light regime, not subject to ongoing supervision by the AFM, we manage the portfolio according to a predetermined, trend-following strategy, with an emphasis on risk management, diversification and transparency. Participation is open from an investment of 100,000 euro.
This article is informational only and does not constitute investment advice.
