If you have consumed popular media in the past year, you’ve more than likely overheard a lot about Bitcoin. You might’ve heard a few sensational things, like it’s the beginning of the end of the world as a threat to countries’ currencies, exchanges were hacked causing people to lose millions, some young kid just became a millionaire and most of all you’ve heard tales of its volatility. You’ve probably heard all of this even if you’re not actively involved with cryptocurrency.
Cryptocurrency is brought up a lot in the mainstream media. Openly criticized by billionaires like Bill Gates, endorsed by the actor/entrepreneur Ashton Kutcher, and hilariously parodied on the hit HBO show Silicon Valley.
During one episode, the frequent antagonist character, Gilfoyle, has an annoying heavy metal alarm that blares at a deafening volume throughout the office. It goes off every time the value of Bitcoin drops below a certain level, so he successfully identifies each time he needs to stop mining it because it became not financially beneficial when the price is too low to make a profit.
When he is confronted about the annoying alarm and asked how many times it will go off, he says with a blank face: “since Bitcoin’s value is incredibly volatile, probably a lot of times.” Throughout the episode, the alarm went off repeatedly, and it severely irritated everyone throughout the office.
For people that aren’t fictional characters that currently have money in Bitcoin and are fearlessly attempting to “hodl,” know the pain of Gilfoyle’s alarm all too well. The Bitcoin price is down, up, moves to the side, rises quickly, crawls slowly down, jumps back up and then crashes very far down. It’s enough movement to drive someone that’s hodling crazy . Will the madness ever stop? Can Bitcoin’s price ever successfully stabilize one day?
What makes Bitcoin so volatile?
A few key things:
- Low volume of transactions
- Lack of regulations/threat of more regulations
- Market manipulation
- Lack of accommodations for institutional funds
Some market manipulation tactics you can see any given day on crypto exchanges are
- Wash trading
Market manipulation tricks are difficult to successfully execute when there is a large volume of money in the market and consistent daily transactions.
More established exchanges aren’t as easily manipulated because of the high volume of daily transactions and institutional money infused into the market.
So what is keeping institutional money out of Bitcoin/crypto?
Ultimately, the underlying volatility of cryptocurrency as a whole is keeping the majority of institutional money out of crypto. There are some institutions that have been willing to be pioneers and enter the market in spite of the volatility, however the lack of proper infrastructure in place on exchanges to effectively service and accommodate institutions is still a speed bump to larger investment sums.
What about the infrastructure is inadequate?
There are a few essential things that are currently missing from exchanges: personalized customer service, sufficient security for large amounts of money, and not enough fiat on-ramps. These three things are considerable barriers to entry for large institutions.
Personalized customer service
Right now you could invest 10 million dollars and complete a transaction, and you have no one to call right now to make sure that it was executed properly. All you have is your wallet information. People that regularly trade and invest this amount of money are accustomed to having personalized help and services. That is not an unreasonable expectation as the stakes are significantly higher than someone investing one hundred dollars into the market.
Security for large amounts of money
Ever since the Mt. Gox hack, there has been a lot of anxiety surrounding investing in cryptocurrency. People have been leery of it, and this is not the first and final hack, there have been other large hacks as well. To store your funds the only way to make it seamless is in a custodial exchange. But exchanges don’t have a lot of safeguards in place to guarantee the safety of the funds. When an exchange overcomes this barrier to entry for institutions it will be a huge game changer for the overall value of cryptocurrency.
Lack of Fiat on-ramps
While there are a lot of fiat onramps that are functioning today, there still is a lot left to be desired. The hassle large sums of money have to go through if there aren’t accessible fiat on-ramps is just not worth it if the trouble. It’s incredibly time-consuming, confusing and a lot of room for error. The better security becomes on exchanges, the more fiat on-ramps will start entering the market.
All in all these three key things are preventing institutions from entering the cryptocurrency market in droves. Once these issues are resolved at the very least, early adopter institutions will join the crypto market, and then the other institutions will eventually follow. Once this occurs, the price of Bitcoin will stabilize because there will finally be the volume necessary to combat manipulation.
We’ll be sharing more posts like these on cryptocurrency as we launch https://www.formosa.financial/ an institutional grade custodial service for high net worth traders, businesses and their complex needs. Feel free to tweet