Every trader needs volatility. Without movement, there is little opportunity to make a decent return. On that basis alone, Bitcoin should be an attractive instrument. Over roughly the past decade, its annualised volatility has been around 68%, compared with roughly 7% for EUR/USD.
And yet we do not trade it. Why not?
Because volatility is useful only when the risks behind it are sufficiently understood.
Imagine we are long Bitcoin with a disciplined stop-loss 2% below our entry price. Under normal conditions, that defines the risk reasonably well. But a stop-loss is a trigger, not a guaranteed execution price. If a sudden shock caused bids to disappear, our order could be filled far below the level we intended. At -5%? Sure. At -20%? Perhaps. At -40%? It is not unthinkable.
We simply do not know.
That matters because Bitcoin has no lender of last resort. Major G10 currencies operate within financial systems backed by central banks that can provide emergency liquidity when markets come under severe stress. Bitcoin has no comparable backstop.
And there is another problem: unlike a G10 currency, Bitcoin also gives us little to hold on to when trying to determine where a price decline might reasonably stop. Bitcoin has no yield, no earnings, no cash flow and no book value. Its value depends on scarcity, liquidity, network effects and, ultimately, the willingness of others to regard it as a store of value.
That is not necessarily irrational ( gold has some of the same characteristics) but it leaves us without an obvious valuation anchor. If Bitcoin falls 30%, we cannot say with any confidence that it has become 30% cheaper relative to fundamental value. We just do not know where that fundamental value is. And that makes extreme downside harder to quantify.
Nor has widespread transactional use provided an obvious source of fundamental demand. Bitcoin’s original ambition as peer-to-peer electronic cash has not become its dominant use case. It is certainly used for payments, but not on the scale originally envisaged. In practice, the investment and store-of-value narrative has become far more important than everyday transactions.
Then there are risks that are harder still to quantify. Take quantum computing.
Nobody knows when or whether quantum computers will become powerful enough to threaten Bitcoin’s cryptography. But the Bitcoin community is already considering post-quantum solutions. Draft proposals such as BIP-360 and BIP-361 illustrate the issue: holders might one day need to move their coins from older address types into newly introduced post-quantum addresses.
That sounds manageable. Until you ask what happens to coins whose owners never move them.
And that brings us to perhaps the most intriguing part of the story. Bitcoin’s creator, Satoshi Nakamoto, disappeared from public view more than fifteen years ago. Nobody knows with certainty who Satoshi was, whether he is still alive, or whether anyone still controls the private keys associated with the enormous stock of early bitcoins commonly attributed to him.
Some of those early coins use output types whose public keys are already visible on the blockchain. That does not make them vulnerable today. With conventional computers, deriving the corresponding private key from a public key is considered computationally infeasible. But a sufficiently powerful quantum computer could change that.
If nobody still controls Satoshi’s original keys, those coins cannot simply be moved to safer addresses. Yet if quantum computers eventually became capable of deriving private keys from exposed public keys, vulnerable old coins could in principle become spendable by an attacker.
The Bitcoin community could try to prevent that by changing the protocol beforehand. But that creates an awkward choice. Do you leave vulnerable old coins spendable and accept the possibility that they could one day be stolen? Or do you change the rules in a way that could freeze coins whose legitimate owners never upgraded?
We do not know how that dilemma would ultimately be resolved.
This kind of uncertainty is hardly unique to Bitcoin. Financial history is full of cases in which sophisticated investors discovered that the risk they had modelled was not the risk that ultimately hurt them. Long-Term Capital Management discovered in 1998 what happens when liquidity and correlations cease behaving as expected. Amaranth Advisors lost billions in 2006 when natural-gas spreads moved violently against it. And Three Arrows Capital collapsed in 2022 as leverage, falling collateral values and margin calls reinforced one another.
We do not necessarily think that Bitcoin will collapse. It may or may not. The implication for us is much simpler.
G10 currencies can move violently too. But they have deep underlying economies, monetary institutions, central banks and decades of market behaviour from which risk can be assessed. With Bitcoin, we see a greater risk that, in an extreme event, liquidity could evaporate and price could fall without either an obvious fundamental valuation floor or an institutional backstop underneath.
We cannot put a reliable probability on such an event. But neither can we comfortably rule it out. And that is enough for us to avoid Bitcoin as an instrument.
Traders need volatility. But they also need to understand the risks they are taking. If an instrument contains risks we cannot properly identify, price or hedge, its volatility stops being an opportunity and starts becoming uncertainty. And if we cannot see the bottom of the pool, we prefer not to dive in. Better safe than sorry.
