Business, Science & Tech, Community & Government
Why Is Crypto So Volatile?
Lesson time 11:56 min
The cryptocurrency market has had its share of ups and downs. Professor Paul Krugman draws economic parallels between traditional and decentralized finance. Then, Emilie Choi and CZ state their case for the importance of volatility.
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Topics include: It’s Speculative • New Markets Are Smaller • Past Results Don’t Guarantee Future Performance • Stock Market Correlation • Volatility Is Healthy
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[OMINOUS MUSIC] [MUSIC PLAYING] - The peculiar thing about crypto is nobody quite knows what it's for, ultimately. What are the fundamentals that determine its value? Since it's not actually being used for anything real, since it's all kind of hypothetical, there is no fundamental. - Every asset type is volatile to some extent. Your stocks are volatile. But crypto is more volatile because it's market cap smart. Traditional markets are much bigger. Things will change when crypto markets get a bit bigger. - I definitely have had many moments of doubt when the crypto winter started to begin. And during the winters, you have these people who are just super committed to building the best technologies no matter what the circumstance is. - Why is crypto so volatile? Well, we've had some previous experience. I think there are a lot of historical parallels. Various pieces of the puzzle have historical parallels. I'm old enough to remember the dotcom bubble. And there were a lot of companies that were being valued at insane prices that had really no business. They were hypothetical. And one of the things that happened in at least a few cases was when they started to get some real business, start to actually get some sales, maybe even actually start to earn some profits, the value collapsed because as soon as there was something real that you could use to evaluate what a stock was really worth, people took a look and said, what? Price earnings ratio of 200. That doesn't make any sense whereas when the price earnings ratio was infinite because there were no earnings, there was no objective standard by which to evaluate it. And crypto is just about entirely that. I mean to the extent that there are transactions using cryptocurrencies, mostly, with a few exceptions, mostly they are actually just transactions that involve trading one crypto asset for another. Imagine a debate. One person says I think that the fundamental value of a Bitcoin is $100. And another person says, I think the fundamental value of Bitcoin is $1,000,000. How do you resolve that? You can't say, well, look, here's the profits that underlie the value and what kind of multiple do you think is reasonable. There's nothing to be multiplied. So once you have an asset that is based purely upon some imaginary and, in fact, even ill-defined imaginary future, of course it's going to move around a lot based upon shifting tides of opinion. Crypto is so completely about what might happen and not at all about what is happening that I think it's bound to be immensely more volatile. - I think crypto market is volatile mainly because the market cap is small. So it's a small asset class. It's $1 trillion versus US stock is $60 or $80 trillion now. So I think that's probably the main reason. Smaller ships are more volatile in a wave and larger ships are just much more stable. And then it's also an early investment asset type. And so early asset types are...
About the Instructor
Since Bitcoin’s launch in 2009, crypto has offered the hope of a stronger, more democratic financial system. And it’s raised plenty of questions as it continues to evolve. Now experts and skeptics at the center of the conversation are sharing a straightforward look at how this ecosystem is changing. Learn the basics, dive deep into the world of blockchain and Web3, and get the breakdown on what you need to know now.
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Chris Dixon, Changpeng “CZ” Zhao, Emilie Choi, and Paul Krugman
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