Are cryptocurrencies less affected by market noise?
My noise canceling headphones are working super fine; I can
truly enjoy tuning out the rest of the world to focus on what I’m doing,
without anyone or anything distracting me. I just wish there was something like
that, but for markets. Something to block all of that market noise and focus on
pure empirical evidence that markets provide.
Oh, but wait a minute; there is such a thing and it’s called
crypto! Those brilliantly decentralized currencies that answer to no one except
market flows and empirical evidence. Yes, those digital currencies are the best
when it comes to fighting against market noise and misinformation that happen
in the markets from time to time.
Old School Cryptos
Ever since Bitcoin’s debut approximately a decade ago, an
increasing number of traditional market traders and experts have found their
way into the crypto space, in one form or another. More importantly, the
creator of the highly used technical tool Bollinger Bands, John Bollinger,
expressed his interest in the instrument.
Bollinger was rather impressed with these cryptos which
seemed to function much like the stock market of old; before all the noise
began disrupting price actions. He then went on to test his theory and prove
it, mind you.
Yes! Cryptos are essentially noise-free – as in, they’re
traded based on pure technical rules with very little deviation from the
analysis. We’re not talking big boys here, we’ll come to that in a moment, but
essentially almost every single cryptocurrency out there is noise-free.
At the time of this article, bitcoin
sits at $9,520 with $175.5 billion market capitalization.
Financial markets – and the stock market in particular – are
being affected by automated traders and algorithmic trading which, in my
opinion, is a plague on the markets – but that’s a topic for another time.
You see, with all of the automated trading, markets have
become extremely noisy. And the volume generated by these machines makes it
really hard for traders to truly understand market price movements; whether
from a technical or fundamental indicator point of view. No one really knows
the market moving power these automated traders have anymore.
So with cryptos essentially free from such noise, pure
technical and fundamental analysis prevail and things turn clearer when
trading.
The Downside
Ever since the resurgence of bitcoin from below $1,000 to
above the $20,000 mark, many investors and traders alike have ventured into
this instrument wanting to make a pretty penny trading cryptocurrencies.
Even the Chicago Mercantile Exchange (CME) jumped on board
and started offering cash-settled bitcoin futures trading (CFD) – although
bitcoin ETF (Exchange-Traded Fund) still eludes regulatory approval.
The introduction of crypto CFDs and futures modified trading
on these instruments, however only slightly. It’s not sure whether these new
instruments have affected the overall price level of cryptocurrencies, but they
did make the trading a little noisier; and that’s what we’d expect.
Such a situation has already happened in the stock market,
with the introduction of stock index futures. It basically hit those markets
which did not already have futures, and so the noise got louder.
Futures activity, hedging activity and things like that
create what is known as non-directional noise. It’s noise that is not based on
supply and demand, or trends, but based on the transaction mechanics of
trading, and we’re starting to see that phenomenon bleed into some of the
cryptocurrencies; but it’s nowhere near as serious of a problem as it is for,
say, U.S. equities.
The Verdict
So what’s the verdict? Well, cryptos do have immunity when
it comes to market noise and the overall transactional mechanics of trading.
And I personally believe that these markets, due to their unregulated nature,
have been exempted from becoming too mainstream for traders of this world.
Which gives these markets a certain edge they can end up using to their
advantage.
This
article was submitted by OneRoyal.
