Volatility - The Problem and things we can do about it

During my 10 years of thinking and talking about crypto it became obvious to me that volatility is the single biggest problem that hinders the mass adoption and consequently the further success of this otherwise promising technology. This is true for all established crypto projects, but especially true for ADA that experiences a substantially higher volatility than competing projects’ tokens like ETH or BTC. Yet, I don’t see any orchestrated effort to address this problem. Like if it’s something inherent to the concept, if it’s a property of the design that we have to learn to live with.

While in this post I will concentrate solely on Cardano (ADA) - because some of my arguments are only applicable to this project -, my conclusions probably could be applied to other cryptos as well. The following is NOT an investment or financial advice. It’s only a thought experiment and the sole purpose of this writing is to solicit conversation about this pressing topic.

First of all, volatility is not inherently a bad thing. It is a crucial capacity of money like constructs to be able to express the changes of price relations between different valuables. We can’t and we don’t need to fight this natural volatility. It is very important to see that what is causing unnecessary damage to the ecosystem is too much volatility. I call it destructive volatility and I’m convinced that this is something that we can push against.

Destructive volatility is a chaotic oscillation of over- and undervaluation periods. While we tend to associate the term with high frequency changes in price, the truth is that volatility happens throughout the frequency spectrum - usually with higher amplitudes at smaller frequencies - and its destructiveness depends on the length of the application: for long term applications high frequency volatility doesn’t really matters, and for short term application long frequency doesn’t. What really matters is right valuation.

When ADA is undervalued people and projects already doing business in ADA are in trouble, when it’s overvalued people and projects who willing to do business in ADA are in trouble. When the two states start to oscillate chaotically the whole thing becomes a nightmare of unpredictability. IMHO it’s only the enthusiasm and the remarkable patience of the community that holds the ecosystem together. Which is admirable, but not sustainable on the long run.

I know that the silent - and not too confident - consensus is that it will go away as adoption grows, but we shouldn’t fool ourselves: volatility is the top reason why people are avoiding ADA, so it’s overly optimistic to expect adoption to solve the problem what holds adoption back. I’m not saying it’s impossible, I’m saying it will be painfully slow and we can not be sure if that enthusiasm and patience will hold out long enough. I say we better don’t risk that and start to do something about it.

So what can we do? To answer that we have to understand what causes destructive volatility. It’s one thing: low liquidity of the markets. Low liquidity is inherently linked to fixed supply that makes people HODL and in ADA’s case it is strengthened by the possibility of staking which is further incentivizes HODL. I have good reasons to say we don’t want to touch neither fixed supply nor staking, because fixed supply is the only meaningful decentralizable monetary policy we know, and staking is the only safe and economically and environmentally sustainable architecture of crypro we know.

So if we don’t want to change the defining attributes of Cardano’s architecture and monetary policy we have only one possible way to change the state of affairs: if we relaxing on HODL. Overvaluation is when there is less ADA on the market than needed, undervaluation is the opposite, when there is more. So if volatility is the oscillation between these two state than it’s easy to see that without moving ADA in (selling) and out (buying) from the market we simply can not solve this problem.

Of course the problem with this is that we can not know for sure when ADA is over- or undervalued: there is an elevated risk compared to staking. But how big is this risk?

I made a little and superficial - but rather conservative - analysis to see that from 2020. aug. 19. to 2021. aug. 19. how many days you could sell ADA and to buy back for 8% cheaper in a year, and the opposite, to buy ADA and sell it for 8% more in a year. (I will release this tool, but more on that in another post or in the comments.) In this period ADA’s price was in an almost steady rise, buying ADA and selling it for more was easy: there was 364 days you could do that. Selling ADA and buying back for 8% less was really hard for the same reason: on only 215 days you could do that. What that means is that without any thinking, any random day you had 99% chance to buy, and 60% to sell (in a pretty hostile market for that kind of move) to make double the interest that we make by staking.

So this is my rule of thumb: ADA is overpriced in my opinion if I feel certain that I can sell it and buy it back for a given percentage less (interest) in a given time-frame (duration). Not likely, not probably, not I have a feeling, not almost certain. No. When I’m certain. (I picked 1 year and 8% to make it comparable to staking.)

Certain like I’m certain that Cardano will prevail. Can I be 100% sure about that? No. We simply don’t see the future, so even if I’m certain in some outcome, I have to be prepared that things won’t go my way. ‘Certain’ in relation to the future only means that we made a very low risk prediction, and we did everything to our best abilities to make that prediction. From this it follows that staking also has an inherent risk: the price of ADA. And if we don’t make the markets more liquid, we’re increasing that risk, which renders this whole situation into a balancing act. All I’m saying is that if we avoid bearable risks too much we risk the whole game.

Because what is the worst case? Think about it. Let’s say we risk 10% of our staked amount on the market. We sell this portion but at the worst moment possible: in 1 year it goes up by 100% and never touches a price 8% lower. Bummer. Good news is that your staked 90% worth twice as much.

And that’s it, that’s what I wanted to say in this post: I think we have every reason to relax our HODL habit, take out a small portion of our staked amounts, bring it to the market and make long term, low risk bets, with our best abilities. En masse, everybody with his/her own numbers, decentralized as it should be, but sharing knowledge and experiences with each others. As strange as it sounds we would serve the community with this kind of ‘speculative’ trading in my opinion.

Thanks for reading,


Well, in some way I completely disagree. You cannot label volatility as good or bad - what is the boundary? It would always be different by different people with different objectives.

Volatility comes from speculation, not from HODL. HODLing dampens volatility, because it decreases amount at the speculative end of trading. From the past, today, and the foreseeable future speculation is the driving part when it comes to market cap in crypto. Without speculation BTC would be worth a couple of cents or even less. In other words FOMO and other speculative motives is, what gives crypto’s value. If you want to reduce volatility you want to remove speculation which would destroy the value of ADA - and any other crypto coin.

That’s just my humble opinion. But others can have different opinions and I respect that - so please respect mine.


One more comment: don’t mix up volatility with liquidity. Reducing liquidity does not increase volatility. HODLing just reduces liquidity not volatility. And, btw., ADA has enough liquidity. I.e., it does not disrupt any trading experience.

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Don’t know about that one. It could also be that the “masses” simply neither need nor want cryptocurrencies, are even less interested in them than in stocks.

And even if volatility was the main culprit (it surely is a big one), I don’t see that measures by Cardano will change the fact that all cryptos more or less follow the BTC price. If BTC remains volatile, so will all others for the foreseeable future.

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A good question for argument’s sake is how well even the best performing Cardano staking enterprises (the businesses themselves… not the delegations) did vs. the rise of Solana’s SOL from its launch value until its own apex around the time ADA had also reached its all-time-high.

You can counter-argue that perfect portfolio moves are always apparent in hindsight but Solana was different because the market news indicated in advance, and all through that rise, that support was pouring in through investment in the project itself and in many related enterprises. But to those of us so heavily invested in keeping the staking enterprises going (even if they weren’t going that well), the repeated “good news” about Solana was likely to be ignored or even met with resentment. :persevere:

In this case if one’s goal was to buy a bigger share of ADA or fund a Cardano project, the best strategy would have been (and still is, because there’s others like Solana coming along) to sell ADA at the height of the hype in favour of the still-unknown project, and buy that ADA back (or balance the portfolio between then) as soon as the 2 markets or market capitalisations achieved a new equilibrium (like Cardano and Solana have today). :face_with_monocle:

Thank You for your answer @jf3110 !

I don’t. I explicitly made the distinction. If in your opinion the volatility experienced on the markets of ADA is acceptable and doesn’t hurt the ecosystem and it expresses the real value that’s fine with me. I just simply think it’s too much, it’s damaging, and it doesn’t express the real value: it fluctuates wildly around it by unnecessary amplitudes.

With all due respect IMHO your understanding of market liquidity goes against it’s very definition:

In business, economics or investment, market liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price. Market liquidity - Wikipedia

Let’s say we have a market where we want to sell 1000 ADA. The market have 1000 traders willing to sell ADA each having a position and a value assigned to that position, which constitutes the spread of the market. Now imagine the same market with 10000 traders. They will statistically create roughly the same spread but with 10 times the value in it. Buying 1000 ADA on this more liquid market will rise the price 1/10 that of the less liquid market. Of course the number of traders doesn’t really matter, it’s the amount of value spread across the positions which creates liquidity. I just increased the number of traders to drive home my original post’s idea.

So if buying an amount of ADA in the market increases the price more in a low liquidity market by definition, it’s easy to see that how liquidity is related to volatility. Consequently I still believe that HODL increases volatility. You are absolutely right that it is not a inherently bad thing. It becomes damaging when it holds back adoption.

Again, with all due respect I think here you swap the order of cause and effect. Adoption gives the value of cryptos. Plain and simple. FOMO and speculative motives are real driving force of adoption, so yes, they are strong contributing factors to the value indirectly. But the distinction is really important to make to understand my point. Volatility is hurting the value because we can not replace FOMO and speculative motives with usability, which is a much stronger and stable force. So by HODLing too rigidly we shoot ourselves in the foot by damaging adoption thus the price of the very thing we are HODLing.

I wasn’t talking about trading experience. I was talking about adopting ADA and to make businesses using it. For example every Catalyst project is founded by ADA. Imagine them trying to plan their finances! Or should they just sell their ADA immediately after receiving their funds? What tells that about the state of matters?

Thanks again,

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Thanks @HeptaSean!

I’m sure not everyone is interested. And honestly neither everyone should be. What I know is, when I talk about cryptos even people interested in theory, are not interested in practice, because of its unpredictable price. Maybe it’s just my envinronment, but I also know that I had good or at least acceptable arguments against usual reservations against cryptos.

But not against volatility. That’s like a brick wall. All I can say, when we reach at this point: “oh, yeah, and there is that.”

I know that you are almost solely here because of the technical aspects, but I’m much more interested in the social ones. So for me it matters how good I can sell the idea.

Yeah, that’s a good point, which goes much deeper into the actual behaviors of traders and their bots. It’s only my speculation, but I think this phenomenon stems from large portfolios managing their assets bundled together. This effect is then strengthened up by trading bots programmed to follow that trend, sell other cryptos when BTC starts to fall and vice versa. It’s definitely there, but in my experience the link is not always that strong and weakening. I’ve got a feeling that this link will be less and less prominent as the market matures and different crypto projects will be more differentiable for even ordinary people.

Thanks @COSDpool !

I don’t know much about any of that, but for me it seems a bit hard to compare a business operation to an investment. For example the cost of starting an SPO business largely depends on the expertise and infrastructure you already have, so how do you account for investment? How do you account for the work, attention and time you need to spend on it? The complexities seem rather different to me as well.

If market news and predictions would be dependable we would all be billionaires! (Actually we wouldn’t, because being a billionaire needs other people to become poor.) It seems in Solana’s case the outlets were right, but we still only know it in hindsight. I wouldn’t worry about that too much.

Anyway, what I’m trying to talk about is really not about maximizing profits. IMHO stakers are too fixated on minimizing risk, while traders seem to be too fixated on maximizing profit. At least this is what the markets indicate for me. Traders are here to maximize their profits, they are here to speculate on price and sometimes manipulate the market for their advantage. I have no say in that.

But the situation of stakers is different. The fate of their investment not only depends on delegation rewards, but on the price of ADA too. So if they would start to see, that by increasing their risk of return a little bit they could reduce the risk of value loss, and that would benefit the whole community IMHO. It’s a win-win opportunity. Maybe it’s a bit hard to grasp, but it seems to be there. Ohh, it wouldn’t benefit everyone. I’m sure the market manipulators like the markets as they are now. Bummer.