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How Should Investors Handle Bitcoin's Volatility?

By Matthew Frankel, CFP® - Apr 8, 2021 at 6:27AM

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Bitcoin has a history of massive price swings, so what's the right way for investors to approach it?

Some investors are huge believers in Bitcoin (BTC -1.18%) and other cryptocurrencies, while others are far more skeptical. But there's one thing that everyone can agree on -- Bitcoin is a volatile asset. 

In this Fool Live video clip, recorded on March 18, contributor Matt Frankel, CFP, asks Onramp Invest CEO and cryptocurrency expert Tyrone Ross about Bitcoin's volatility and what investors should keep in mind.

Matt Frankel: One of the things they're most worried about, and it's something that Bitcoin bulls are really excited about, it's the volatility. Right now, as we're speaking, Bitcoin is worth nearly 10 times what it was a year ago.

Tyrone Ross: Yeah.

Frankel: Being fair, that's not stable as a payment mechanism.

Ross: No.

Frankel: What do you say to investors, even with a high risk tolerance, who are worried about the volatility of Bitcoin?

Ross: I want to address what you said. The Bitcoin blockchain is a beautiful payment mechanism. The price isn't. So you've got to separate those two. I agree with you. It shouldn't be a payment mechanism.

Now, there's something called Lightning that's being built, but you shouldn't be buying things with your Bitcoin anyway, for exactly what I said. Every time you buy a coffee, that would be a taxable event, and there's other things to that. What I think is important here with the volatility is, yes, those of us that are crypto-hippies look at the volatility and say, "Oh, it's great," because we can stomach it and we know better. The average person goes, "It's down 80%." A lot of people can't stomach a 10% drop, 5% drop, 1% drop. This thing drops 80%? A lot of people don't want to take that ride on the roller coaster.

But the volatility, when you learn about Bitcoin, is a feature, not a bug, and it's one of those things where, when you look at it, it also is proof of how early we are still. It will smooth out. Last month, the 30-day volatility had jumped higher than it had been, I think, for the previous seven years. Going back to 2013, the 30-day volatility jumped up 160-plus percent. My company did some research on that. It got picked up. So the volatility has picked up. The correlation to risk assets. A year ago, when things went nuts, it went down with it, because the first thing you do is you sell risky assets, so we're still there. But every day it gets stronger and grows and it stays around and you get more institutional adoption, and there's the ability for large investors to move in size with best execution, and best price discovery. Those things are important, and we're getting there.

But for the time being, yeah, the volatility for those of us that can stomach it and know, go, "Yes, It's on sale," but not everybody can do that. And that will change.

Frankel: So the way you look at it is the more important thing would be Bitcoin moving from say, 10% adoption to 20% adoption than moving from $20,000 to $50,000?

Ross: Exactly. That's the key, and there's that volatility and adoption too. Because think about it. Go back to 2017. It's all retail, and now all the institutions are like, "Look at these idiots." Now, you've got the institutions coming in, and now all the retail that was in and stayed in, they're like, "Look at these idiots." So the volatility of who comes in; the volatility of price; the volatility of price discovery.

I did a webinar with Digital Assets Research and FTSE Russell, and at any point that you can check the price of Bitcoin across some exchanges, it could be off by 2%. That's crazy. There's volatility in a lot of different things, which is new, and the best example is this; I'm not a parent, but I have three nephews. You ever watch a child learn to walk? That is very volatile. "Oh, they're going to hit their head. Oh, they fell again." And you know what they do? They get up, and they keep trying, and they fall.

But it's a very volatile thing. It's new. Anything new, or any 12-year-old -- Bitcoin is 12 -- 12-year-olds are volatile. I say this in jest comparing a technology to a human being, but anything that's new is going to be volatile. It just is, and then it has to find its way, and I think that's what's happening in this space.

Frankel: It's fair to say as adoption keeps going, it will eventually stabilize. That could be 20 years from now, but it should eventually find some kind of equilibrium.

Ross: Yeah, it will. I think folks like myself, long-dated call options on a store of value, I think it will get there. I don't think it's there now, but you're betting that it'll become that in the future.

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