Mimesis Capital: Inside The Event Horizon, Report #15
Why Does Bitcoin’s Price Make Random, Sudden Downward Moves?
A common knock on bitcoin is that it is “too volatile.”
There is no denying that bitcoin is a volatile asset. Its price action supports this conclusion on nearly all time frames (including minute, hour, daily, and yearly).
However, volatility isn’t necessarily a bad thing. In fact, volatility creates opportunity.
Over long time horizons (4+ years), bitcoin’s volatility has been mainly to the upside. Using this longer time horizon helps to eliminate the noise and focus on the signal.
Volatility and return can be assessed using something called the Sharpe ratio, which measures risk-adjusted return. The Sharpe ratio is the result of dividing the asset’s return by its risk/volatility over a 4-year HODL period.
Bitcoin’s Sharpe ratio has been higher than that of every other asset class throughout its entire existence. This is one of Wall Street’s favorite financial metrics, and it screams, “Buy bitcoin,” as it shows that the return of holding bitcoin has more than compensated holders for its historical level of downside volatility.
Large, Quick Downward Moves
Why does bitcoin have such large, sudden downward price moves? What is causing these massive corrections in such short times?
Unlike equities (stocks), which tend to be traded aggressively on earnings days (days when companies’ performance and future guidance fundamentally change), bitcoin tends to be traded aggressively on seemingly random days.
This strange phenomenon tends to confuse traditional commentators and journalists as they struggle to find any news piece that could have affected the price so drastically.
Eventually, someone finds some possible explanation, and it immediately gets circulated as a result of confirmation bias.
- “Bitcoin fell 10% because of the Biden tax hikes”
- “Bitcoin fell 10% because…