Keep it boring, String
Liquidity, like access to venture capital, is always available to anyone who doesn’t need it. In public markets, liquidity is changing. We used to have a market made up of agency traders and investors setting the prices at which they would take personal risk to buy or sell, creating friction along the order book.
We don’t have price-setters anymore. We have delta-one arbitrage algos. We have liquid markets when we have calm, hedge-able markets. Market liquidity is a thin veneer. There is no friction at those moments that liquidity is needed most.
Liquidity is the water in which markets swim. In a sentiment-driven market like cryptocurrencies, liquidity is not just any factor to watch, it is perhaps the most important factor.
So when a $13 million trade causes a cascade that wipes out $22 billion in “market cap”, it is worth documenting.
The point, of course, was to warn people about liquidity, particularly at a time when we could be seeing large liquidations. And this cuts both ways: high short interest and low liquidity is a recipe for violent moves up.
Bitcoin zealots didn’t see it that way, and I found myself swarmed by market structure illiterates looking at the wrong volume charts, Microstrategy White-Knights arguing about where they’ve been told the true liquidation price is, and other possibly-human accounts attacking me for pointing out something they would rather not see.
It’s a tough scene. A lot of Bitcoiners have had outrageous wealth dangled in front of them, so close they could touch it with the end of their fingertips, only to see it start sliding away. And they think that the perfect set of words in a perfect tweet can stop the slide. If only they can control the message. So they focus on controlling the message. An increasingly desperate and nonsensical message.
So persuasive have been the Bitcoins promoters, so uninhibited by regulators, so effective at reinforcing their most faithful believers, and so intolerant of heretics, that we now have an army of investors whose core investing philosophy is defined by their refusal to ever sell. HODL is the rallying cry.
What if the price drops? I’ll buy more! Take that, world!
And now they are trapped inside a belief system where the market is contradicting their faith.
And how do they reconcile price drops that contradict Bitcoin dogma? By telling themselves that a price drop is a trial, a test of faith. The apostles will talk of past trials, and how they feigned certainty of outcome, how they just knew the price would recover after past crashes, how a willful ignorance of risk management led to lambos and wealth, and you can flaunt all that too if you just pass the trials and HODL…
I don’t know what happens to bitcoin from here. There are questions about Tether that to me seem unanswered. There are liquidations looming at every support level. And there is an aura of enthusiasm that may never be recaptured.
And there is an army of zealots, there is battle-tested messaging that has resonated, and there are some of the best minds of our generation dedicated to building and proselytizing the tech.
What I want to happen, what I think would be best, is a long period of… nothing. Let the get-rich-quick crowd get bored and move on to something else. Give everyone some time to take a breath, to reflect, to relax.
Wanna know what kills more police than bullets and liquor? Boredom. They just can’t handle that shit. You keep it boring, String. You keep it dead boring.
-Proposition Joe, The Wire
If crypto markets get boring the scammers would move on and the builders would have time to build. As time passes market volatility will pass. And as the waters get calm liquidity will return.
But will that happen? Of course not, so be prepared for more chaos. Because when the faithful lose their faith there’s no telling who that anger will fall upon.
Interesting post, Phil. You may be interested in the paper that my colleague and I are just finishing now, "A Price-Independent Measure of Cryptocurrency Trustworthiness." One of the components is, in fact, vol.
More please!