BITCOIN’S UNPRECEDENTED LIQUIDITY CAN EXPLAIN ITS PRICE VOLATILITY
In March 2020, major stock market indexes saw some of the worst price collapses in decades, as markets confronted the realities of the COVID-19 pandemic. Bitcoin was no exception to these economic strains. Having traded as high as $10,000 in mid-February 2020, bitcoin’s price collapsed to below $4,000 by mid-March, including a 30% drop in a day.
Fear caused a flight to cash in across the board, from domestic to international traders, large-cap to small-cap assets, gold to bitcoin. Markets fell, and bitcoin did too. It was clear that in the face of market shocks, bitcoin’s unique attributes, as listed below, could make it more vulnerable to price collapses as compared to other asset classes:
Offering final, global settlement within minutes
Accommodating liquidity across all major currency pairs
Lacking a central authority, which can restrict or influence trading behaviors
These attributes are unprecedented among asset classes and help make the case for bitcoin to be regarded as the most liquid asset in the world. How many assets can offer final settlement, on billions of dollars in value, in minutes, anytime, any day, anywhere?
Although other asset classes have larger market caps and higher daily trade volumes, their limitations in terms of trading hours, holidays, and “circuit breakers” become readily apparent now that an alternative exists.