Volatility is Great for Traders, but is it for You?
If you would have bought $1,000 of gold 4 years ago, now it would be worth of nearly $1,400. If you would have bought $1,000 of Bitcoin 4 years ago, now it would be $43,000.
Today we would like to talk about volatility. According to dictionaries, volatility is the degree of price or return variation over a specific time. Therefore, if price fluctuates (increases and decreases) over time only slightly, volatility will be low, while on the contrary - with significant fluctuations, volatility will be high.
Is it good or bad? And the answer is: “it depends”.
If you are a savvy trader that is comfortable with price monitoring and is able to exploit momentum, trends, etc. – you will be happy to have a high volatility. However, if you are a merchant or shop owner and you receive payments in currency X, and see its value decline by 20-30% overnight and then increase – volatility might be a problem for you. Due to that reason, currently reserve currencies, such as USD, EUR, GBP, JPY, CAD, and several others are used as the main means of international payments – because their volatility relative to other available options is significantly lower (of course there are other reasons as well why only these currencies are used).
These currencies were relatively a stable choice for all merchants worldwide until a new so-called digital currency emerged – Bitcoin (BTC). Bitcoin was created to provide humanity with a new mean of payment – free of government control, and decentralized, thus in theory no single party can execute ultimate control over Bitcoin payments. Because of that, in the beginning (and now also) Bitcoin was mainly used for illegal purchases on Dark Net, and money laundering. However, with wider adoption, Bitcoin payments became more secure and transparent, as many merchants implemented Know Your Customer (KYC) and Anti-Money Laundering (AML) policies and procedures. However, it may have made some Bitcoin payments more transparent and compliant, it didn’t solve the core problem of Bitcoin – it’s volatility. It’s no surprise that Bitcoin value can double within less than a year, and can half even faster.
That results in merchants being reluctant to accepting Bitcoin and other crypto-currencies that have emerged since then, as a mean of payment. And most of the ones who do accept Bitcoin do it in small amounts, or immediately convert it to traditional fiat currencies (such as USD or EUR). While on the other side, traders are happy to use Bitcoin for speculative purposes, while earning and losing significant amounts of money.
This situation leads to a phenomena that a digital currency that was created for payment means is transforming to digital investment commodity, and has earned a status of speculative asset, therefore larger merchants are not ready to accept it as a mean of payment. Would you accept stocks of Apple or General Electric as a payment, or some micro-stocks? And the volatility of these stocks are usually even lower that that of Bitcoin.
30-Day BTC/USD Volatility
Current environment of Bitcoin and alike crypto-currencies lead to the conclusion that market needs either to artificially intervene and decrease volatility, or need to create a new type of instrument which would allow decreasing volatility and consecutive risks of crypto-currencies. And this is exactly what we do at Alter Securities.
We created a new type of financial derivative – Tranched Value Security (TVS), which allows users to fix the risk/return exposure to an asset (including Bitcoin) only to the desired level. It implies that if you fix the exposure to the upper 20%, when Bitcoin declines in value by 5%, 10%, or even 20% - your holding does not change in value at all. It stays fixed. However, if Bitcoin increases in value above the price at TVS issuance – you also participate in upside exposure. It’s like buying a lottery ticket once which never expires – if your number wins – you can win also, but if your number loses – you keep the money for the purchase.
On the contrary to that, for traders who want to experience greater volatility and are able to exploit market inefficiencies – they can get exposure to the lower 20% of Bitcoin value. Like this, if they purchased TVS with lower exposure in the market after decline in BTC price which occurred post-TVS issuance, they can get these portions of value for bargain price and earn on the upside much higher returns as compared to BTC holders. So if 2 TVSs with same parameters (50% value claim, or $50 fixed) were issued when BTC price was $100, but then price declined to $60, the lower-exposure TVS will have a value of only $10, and then when BTC increases only to $70 – the lower-exposure TVS will have a value of $20, making the return of 100% to the purchaser.
Tranched Value Securities are a new type of financial derivative, and can be highly customizable depending on your needs or desires.
We are excited to reveal some of our upcoming developments and we hope you will join us on this journey.
To learn more about Tranched Value Securities, sign up for email updates on our website. To stay up to date on Alter Securities news and announcements, follow us on LinkedIn, Twitter, Facebook, or Instagram.