Cryptocurrency and traditional finance are worlds apart. Volatility is arguably one of the major components that differentiate the two. In the wake of the most recent downturn, skeptics have re-committed their efforts to vilify crypto—even to the point of associating it with Ponzi schemes. Does this imply they’re getting something wrong?
Crypto has been going through a tough time over the past few months. Numerous alternative cryptocurrencies also declined as Bitcoin lost nearly 70% of its value from its all-time high. The much-hyped decentralized finance experiment Terra’s ecosystem came to an end when its algorithmic stablecoin lost its peg to the US dollar and a bank run rendered $40 billion of tokens essentially worthless. Several high-profile lenders and hedge funds faced disaster after crypto collateral that seemed sufficient to support loans one day became deeply discounted.
A more recent case that continues intensifying the no-end-in-sight for crypto’s deplorable performance is that of major crypto miners such as Core Scientific and Bitfarms Ltd. selling off their bitcoin holdings.
A number of factors shape how people view scams and shady behavior in crypto, including universal access, immediate price discovery, and greater transparency. Universal access, for instance, has made it easier for scammers to perpetuate their activities due to the ease of launching them. Transparency, on the other hand, does more harm than good in the crypto space. For banks and other traditional financial institutions, transparency isn’t a priority. Oftentimes, their operational architecture is hinged on a wall-street-like system where systems rely on manual processing, hence obscure. Even though transparency, intrinsically, plays a role in compounding fraudulent schemes, it also has a positive side. Think of how the majority of scams are usually brought into the limelight. This makes it an essential tool in countering such behaviors.
Simultaneously, the novelty of crypto is closely tied to how different coins operate. Today, many startups are using crypto as equity because price discovery and liquidity are some of the components that startups zero in on most right from inception. Compounded by the convoluted infrastructure, crypto volatility is even harder to explain and/or control.
Volatility, however, is not that deplorable per se. A key part of this process is understanding what volatility in crypto markets means—what signals it sends and what it responds to. Besides learning what is possible in this new ecosystem, investors and entrepreneurs are also learning what isn’t, and why some of the lessons learned must transcend the technology sector. As a bonus, price swings convey valuable information to founders and investors, especially during the startup’s crucial adolescent phase.