Bitcoin’s leverage-fueled volatility
Massive spikes and troughs in the digital coin’s price trajectory
Bitcoin volatility is easy to spot. One look at the bitcoin’s futures price chart shows it is not a trade for the faint-hearted.
The most popular digital coin future plunged a low of around $3,200 in December 2018. But by early June 2019, bitcoin shot up to a high of nearly $14,000.
The cryptocurrency now sits at $11,990, down more than 14% from its recent peak.
Leverage, leverage, leverage
According to Jeff Dorman, the CIO of asset manager Arca, only a part of bitcoin’s sharp ascendancy from $3,200 can be explained by fundamental factors. In his assessment, the rise from around $10,000 to $14,000 was purely speculative and fuelled by traders’ use of leverage.
The subsequent volatility in bitcoin was also caused by leverage, which can be used to play both the long and short sides of a trade.
“No new money came in or out… it was just levered bets. And levered bets cause massive volatility on the way up and down,” says Dorman.
The bright side of Bitcoin volatility?
The bright side to this, if you can call it that, is that the everyday investor has still not got into the act, and has therefore been saved the volatility and/or losses.
Only institutional investors and large speculators have been active during this phase.
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