Bitcoin Volatility, Fear, & Greed

White and Brown Bridge over Body of Water

Galveston Island Historic Pleasure Pier, Galveston, Texas, Photo by Matthew T Rader.

The stock market is the only market where things go on sale and all the customers run out of the store.

- Cullen Roche

Besides love, nothing drives people crazier than fear and greed.

In markets, these emotions sometimes drive excessive volatility. When prices rise, we take more risk than we otherwise would. The faster the rise, the more we throw caution to the wind.

When prices fall, we reduce risk more than we otherwise would. The bigger the fall, the quicker we run out of the store.

This is all just human nature of course. We hate missing out and we hate losing even more.

Just as fear and greed affect how we behave in markets, they affect prices too. You get lots of investors fleeing losers all at once or chasing winners together and prices fall or rise respectively.

The more intense the collective emotions, the bigger and faster the moves.

This is a circular dance. Emotions affect prices which in turn affect emotions in a positive feedback loop that serves as the source engine of price volatility.

Which brings us to bitcoin...

Bitcoin and Volatility

Bitcoin moves fast in both directions.

The price fell more than 80% from the December 2017 high to the December 2018 low. Then, it rallied 800% from the March 2020 low to the January 2021 high. And that’s just the past 3 years.

Bitcoin is 5x more volatile than gold and 9x more volatile than the S&P 500. Have a look at a five-year chart of the 30-day volatility comparing the three:

(Click on image to enlarge)

Bitcoin, Gold, & S&P 500 30d Volatility Chart.png

Along with the price volatility, it’s been an emotional rollercoaster.

HODLing, Fear, and Rational Investing

Modeling a rational long-term investment approach is not the hard part about wealth management. The hard part is following through on that plan with discipline over years without getting derailed during periods when the market falls sharply as it did in the Spring of 2020.

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