Why Asians Should Invest In Bitcoin And Cryptocurrencies Despite Volatility And Current Price Drops
Why Asia Should Invest In Cryptos Despite Volatility
Asia has always been more open towards cryptocurrencies, and it appears that this trend will continue. According to new reports, traditional financial markets in Asia started recognizing the advantages and potential of accepting digital currencies as an official asset class. Hong Kong's SEC recently stated that it plans to explore the ways of regulating crypto trading.
The US itself has already started working on a preliminary legal framework that will introduce digital currencies as well as futures based on this asset. Not only that, but BTC futures trading volumes also experienced a significant rise in trading.
While this is seen as a positive development for the crypto space, many are wondering why is this happening now? What has changed? Questions such as these are only natural, considering that institutions were hesitant of joining the crypto markets due to the high volatility of digital currencies.
However, the fact that cryptos continue to grow even now, and that the number of investors and supporters of this technology continues to rise, have inspired even traditional investors to give it a chance. Even governments of numerous countries decided to recognize this trend and try to keep pace with the development of the market. While cryptos are not a traditional asset class, attempts at regulating the space and trading will give them additional credibility. At the same time, doing this can significantly reduce the risks that investors are facing on daily basis.
Is Volatility Really Such a Big Issue?
Investing in any cryptocurrency, including Bitcoin itself, can be compared to making a call option on its price. In such cases, the investment itself can be seen as an option premium. If the volatility of that asset increases, so will the value of the option.
This is a useful relationship which can be reflected in a binomial tree real options pricing model. By developing it, making the right call regarding crypto investments becomes that much easier. Through the application of a real option valuation model to the price of a certain cryptocurrency, such as BTC, it becomes apparent that it is very steep. The biggest reason for this is high volatility.
Volatility itself is not new, and it did not come with cryptocurrencies. In fact, it dates back to the Holland's Tulip mania of 1841, where numerous individuals became rich after entering the tulip market. While this situation could not last forever, the rich quickly bought the flowers, only to sell them again and make a quick profit. The price dropped soon after that, and it never returned back up.
Many have taken to calling this phenomenon a bubble and tried to solve it, at least in theory. The oldest such theory claims that this is a virtuous cycle, where a few investors become very successful, which attracts the attention of the public. Due to the enthusiasm and heighten expectations, everyone rushes into a certain business, expecting that the prices can only grow in the future. Soon enough, too many people are in the business, expectations remain unfulfilled, and a price crashes back down, after the bubble bursts.
Will This Happen To Cryptocurrencies?
Because of this, a lot of people are now viewing cryptos as another tulip mania. Others see them as only the first step in the evolution and development of blockchain, which can be used for new and innovative business models.
While digital currencies are expected to capture a large portion of digital future's economic value, many still see them as a way to diversify their own portfolio and a method that will allow them to hedge against traditional markets. Recent studies have shown that cryptos have had no correlation with other asset classes through the larger part of their existence. This has barely changed, although several analysts are claiming that the correlation is possible.
All in all, cryptocurrencies do suffer from extreme volatility, which means that their probability distribution can be similar to either a normal distribution or to an exponential distribution. This is why institutions that know how to handle volatility are willing to give them a chance, and why their interest in crypto assets is growing
Possible consequences of this may include three things — institutional adoption, additional capital for the crypto market, and eventual decline of volatility as cryptos become more institutionalized.