Cryptocurrency Market Volatility is a Good Sign?

Title of this post is not as much of a question than a statement being made. The current state of crypto prices fluctuating is signs that free market is operating the way it should. Look I am not saying unstable prices is helping crypto gain traction as an investment. However I am saying that the price swings are due to natural causes of a free market. This instability is apart of the asset class's growth and in the long run provide the necessary building blocks to build trust among its investors and in turn make the asset class a much longer term holding.

Transparency

The blockchain of all top market cap crypto tokens are transparent for all to see. All trades and activities of the tokens are recorded and tracked with date stamp. Investors basically can see all the past transactions to know how much of the token is allocated to which wallets and other useful data without any cost. This form of transparency is apart of the reason why crypto assets are great investments.

Chart above is the FED's current asset purchase book value since 2007 to present day. The Great Financial Crisis saw the FED do unprecedented measures to keep the US economy from total collapse but that also lead to a double in asset purchases from close to $1 trillion to $2 trillion. Along the years after the crisis the FED had continue to purchase more and more assets until Covid-19 hit the US near the early months of 2020. That event basically had the FED double the asset book again. Now at close to $8 trillion in assets held by the FED that bought from banks and real economy but the public does not know what they are.

Not only is what FED purchased not made public to the American people or the world even the current US Treasury Secretary Janet Yellen has stated the FED does not need to disclose nor be audited for what they are doing.

CNN's Source Article on Yellen Support on NO Audit on FED

So the FED can print all the money they want to purchase all the assets they want without having to disclose them and be transparent as to how much they purchase. This being acceptable to the US government proves that the market is not only manipulated it has been accepted as such. How can a free market operate under the premises that there is an entity that has the ability to buy any and all assets?

Stock Market Volatility

Some Wall Street traders and quants have been open about why current status of the stock market is a ramp up in prices. Especially the stock indexes. The main reason behind this ramp up is the natural flow of money into the system through pension and 401k investments. There is always buying each and every day in the stock markets.

When ever the VIX, gauge of SPX index volatility, rises there is inverse correlation of SPX falling. This is mainly due to the signs of fear from investors when VIX is higher which in turn creates selling pressure in the indexes. However if market volatility was limited or suppressed the price movement in stocks tend to be neutral to bullish.

One maybe then asking is how can the government or the FED to be exact suppress the VIX so to make sure volatility is limited. If it may sound outrageous that may not be so as there are evidence and stories made publicly on traders who were able to manipulate the VIX for their own benefits.

Manipulating the VIX Source Article

The scheme allegedly exploits a flaw in the VIX, which allows traders to influence the index without risking any capital, simply by posting S&P options quotes. The profits from this activity amount to "multiple billions,"

If traders can find a way or have manipulated the VIX it is doubtful the FED would not be able to manipulate the VIX. By all accounts since post Covid the VIX has been trending down even though the economy has been struggling while unemployment at record highs. No reason to have the stock market track what the real economy is facing right? Then how is that a free market when stock markets are on its own trajectory in evaluations?

Let us be real here and focus on the facts. Stock market is an evaluation of future growth of companies in terms of revenue and profit. To see the market continue to rise would mean the economy would be booming too.

The unemployment versus stock market has actually be inversely correlated for over two decades. This makes sense because the less unemployment would be higher business revenue and profit. While higher unemployment would result in lower business revenue and profit. Yet just looking at the chart for the inverse correlation one can also notice that unemployment is still higher than when the pandemic started. However stock prices have continue to soar to all time highs, basically doubling from 2015 to present day value. While unemployment went almost nowhere from 2015 to present day hovering around 6%. How is it that the stock market deviating from the real economy this much?

Without a full understanding of the risk investors have in the stock markets they are basically investing into the market on the premise that it will go higher in the long run. What if this is not true? What if markets will not always go higher? A price manipulation will not be able to allow investors to dilettante the real facts from speculation. Therefore a potential of a "black swan" event occurring increases in probability due to the distorted skew in risk of investing.

Conclusions

Cryptocurrency on the other hand has no mechanic to distort its volatility like that of the SPX. Furthermore crypto is traded all over the world hence if it falls or rises in price it effects are felt globally. The free market allows crypto to be evaluated at any given price at any given time. Hence the price movement may shift significantly due to geopolitical concerns.

Then on the opposite spectrum the stock market such as that in the US have so call safety controls and hidden traders that can support the market under heavy selling. For instance if the market trading session had too much of a selling pressure the markets will stop trading temporarily and if it persists it will stop for the remainder of the day. Then there are stories or legends of the PPT, plunge protection team, that became well known to the public once it was disclosed that certain time periods in past trading events the PPT came in to mitigate the falling in price drops.

PPT Source Article

I have brought out just some of the many instruments traders and government has to limit the selling in stock markets. None of these same instruments are seen or used in the crypto market. In turn this has brought turbulent price swings in the crypto market. Yet what if this is the necessary steps toward building a trustworthy and free market in the crypto space? As the old saying goes more gains tend to have more volatility. This is because price swings that are large usually equate to higher volatility.

Thanks for reading.