Why Do Volume and Liquidity Matter... Even To The HODLer?

By BitcoinGordon | BitcoinGordon | 30 Mar 2021

Dearest Cryptonians,

I write to you from the island of... nevermind.

This isn't Myst; this is the Half Life of a cryptocurrency and you're invited to join in the fun.

Weird... okay back to life, back to reality.

This is a story about the cryptocurrency market, and a curious thing that only becomes curiouser and curiouser (I know it's bad anglish, but if Lewis Carroll can do it, so can a mute super hero... and btw is it just me, or does L.C. look an awful lot like Hugh Grant? vice versa, respectfully). Hey listen, my blog, my tangent!

That curious thing, is value. There are a LOT of opinions and interpretations about how the value of Bitcoin is weighed. Much of this is true for any asset that can be traded on exchange, but I'll focus on Bitcoin for the specifics.

Some will say that it is inflationary. Others will say it is deflationary. A lot of great articles have been written about this, and it is my interpretation that both of these interests and concerns have been almost perfectly factored in to Bitcoin's design. It is true that the scarcity model of Bitcoin's design will cause pressure against the market price, the closer it comes to running out of circulation available. But, it is also true that it will continue to be mined until every last drop of value can be squeezed out of an over-rated, poorly designed hyper-graphics card. As long as new coins are mined, regardless of the difficulty, there is a supply/demand value being added. It is resistant to the failures built into the old, greed-based economy. But, it is also heavily influenced by those very people and institutions that jealously wish to own anything of value no matter the tech or pretext. Bitcoin lives in the open world regardless of ethic, idealism, philosophy or motive. Everyone who has access can utilize it to one degree or another.

These are all factors in an item's value.

Bitcoin has street value, although it is easy to argue most assets are better for general all-purpose exchange. Anyone who can spend a $1 to pay for a $1 item would prefer to do so with paper fiat without waiting on a transaction network and paying a transaction fee. Logical (although other cryptocurrencies can do this extremely well, and free!). Bitcoin has store of value- value. Anything just over a decade old that outperforms precious metals has proven its effectiveness and reliability to the point of proving its store of value- value. Bitcoin's got trade-value: as long as people are interested in buying it from another person, and yet another person is interested in selling it to someone else... that creates a tangible value.

There are other points of value, but the latter is the one I wish to focus on. I think people can get 'value' from understanding this.

I focus on the 100% HODLer. I appreciate you. I think you bring a great important message to crypto, and will eventually also generate overall value to the ecosystem. For now, there is actually more value in volume and liquidity, and I'll tell you why. Unlike gold, Bitcoin does actually serve purposes that cross into currency, where for the most part, no one is lugging their gold around trying to chop off a chunk to weigh in order to buy groceries. Now, gold does also hold value in other forms, like jewelry for instance. And, there are actual gold coins that can be used to transact. But, Bitcoin is designed with those 8 wonderful units after the decimal, so even when the price goes ridiculously high, it can be used to buy and sell. But, volume and liquidity are largely misunderstood, or even worse, completely not understood at all.

I will use an analogy that will either help a great deal, or make things infinitely worse; you decide hehe.

Gordon Freeman, a theoretical and applied physicist, has a great love and respect for atomic sciences. An atom has 3 main elements; a proton, neutron, and electron. The vast majority of an atom is empty space. The constant perfect harmony of rapidly moving energy and directional charge give an atom a sense of permanence of the overall mass of that atom. If we compared it to something larger, easier to conceptualize, imagine a globe the size of a basketball, for instance. Imagine if there was a tiny sphere at its perfect center that the ball rotated around; a sphere not larger than an aspirin, or something like that... you get the idea. The surface of the ball spins at such a high rate that it generates something equivalent to massive G-Force. Our perception is that this ball is a solid object, but in reality it is tiny, properly charged microscopic objects spinning around the entire surface shape so fast, that they are essentially in all places at all times, with perfect symmetry. If the elements of the atom didn't spin around the core, there would be no ball. But, if they spin fast enough, they create the illusion of a solid sphere. This hyper-fast movement, better than a magician's slight of hand, makes solid matter.

Pretend that a Bitcoin is solid matter. The precise value that it is currently worth is as erasable, invisible as vapor (I think that's my second time using that word this week... interesting). Volume creates liquidity. Much like the volume of a physical object, without some physical substance, volume does not exist. With Bitcoin, volume is the amount of Bitcoin that is being bought and sold in a given time-frame. Liquidity is a measure, again a form of value, that is created by a healthy dose of volume. If volume becomes too low, people start to see cracks in the wall, and it is as if you can see invisible holes in the basketball starting to form. The spin isn't fast enough to create the illusion of a solid object.

With volume, if a Bitcoin is being bought or sold every minute, and we see this on the order book, it is relatively easy to assume a certain, consistent value, and it unlikely for the form of its substance to break down based on observation. But, the real value is liquidity; the ability to grab that basketball and allow it to interact with its environment. You can bounce it, throw it, make a basket and win at HORSE.

Liquidity is essentially the ease of use that is created by good volume. A liquid asset maintains value. It can only exist with enough atoms spinning at a violent pace... errr... liquidity only exists where there is a consistent flow of buys and sells.

If someone were to ask why a low cap coin that just did a 10X is not considered more valuable than Bitcoin, part of that answer would be to look at its liquidity. If 10 days from now, 10 weeks from now, 10 months from now, its volume is dirt, which most low cap coins are once they have been properly pumped, people forget about it and stop listening to the shills of bag holders that are desperate to get out from under.

Here is an interesting point of perspective. Last year, 2020, at its lowest, on Binance, Bitcoin/USDT volume was $80 Million. LAst year, the same metric broke $1 Billion for the first time. In comparison, in a post-PayPal announcement- world, the lowest BTC/USDT-Binance volume has been in 2021 is $2.6 Billion. That's insane! WOW! But, love Bitcoin or hate it, it's proof as a store of value comes largely from people's willingness to trade it.

Now, I will use the real world equivalent example. Most people that know about economics hate fiat... pretty much all fiat. But, I use a fun saying from the real estate world: buyers are liars. Say it out loud, it rhymes- hehe. What that means, is that everyone has a list of exactly what they know they want in a house, and they wear the real estate agent ragged searching all over town for the exact features they want, from the granite kitchen counter to the 2-sink bathroom, perfect backyard, no traffic etc. But, then they fall in love with 'that' house that barely ticks any of the boxes that were 'mandatory' 'deal breakers'. The same can be said for fiat and its volume. Whether it is a check, cash, credit or debit, national currency may explode, but until the very end where you can literally carry around piles of paper in wheel barrows, people continue to transact in fiat because it is liquid. Until a country declares a fiat payment illegal, it is what everyone uses if they have it. For that reason, people are essentially fearless to trade fiat over Forex exchanges. They can watch value fluctuate like stonks or crypto, and not worry so much over liquidity. Even if at some point someone thinks the U.S. dollar is a store of value, because they know they can exchange it for, lets say a gazillion pesos in the future, the only reason they may place confidence in a country's fiat, is because of the ability to transact when the time comes. Without volume, there is no liquidity, and without liquidity, there is no capability to acquire the value that is being stored. At that point, it's hot potato for the HODLer, and that certainly is not their intention.

Here is another interesting scenario; this one not purely based in fact. Imagine a world in the future, where there are no more gas-powered cars being manufactured. It is said to be coming in the next 20 years or less. But, lets say that the entire business model of convenience stores is based around the gas they sell outside the shop. Let's say that 10 years beyond electric or hydro-powered cars, there are fewer than 10% of the number of gas cars on the road as there are today. How many convenience stores will remain opened? That is liquidity. If a person with a super sweet, perfectly restored '57 Chevy can't get far enough down the road to find a gas fill-up, its eventually going to remain parked until it is nothing more than a museum piece. No matter how rockin' the wheels, or how perfectly preserved one's ideals (another rhyme!), that car isn't getting its kicks on Route 66 without a place to fill-er-up.

Now, bring this all back around to Bitcoin. We assume, that all early adopters who are jealously guarding their HODLs, will score massively big. The more PayPal, Visa, Morgan Stanley announcements, the more coins Elon and Saylor race to purchase, the better their HODL stack looks. But why? The answer, my friends, is the value-energy created by volume, and that is the willingness to transact. That willingness is fueled by liquidity. Without it, you aint takin' that '57 out anywhere. You can say it doesn't matter, when Bitcoin hits $1 Million, I can cash it out from my hardware wallet. True... but where? Only if it is allowed, and someone can convert it from Bitcoin to... whatever it is that you value in comparison to $1 Million. That, is volume... that is liquidity. It is only worth something, if someone, be it a bank or a person, is willing to take it off your hands.

Back to the cars. Right now, we still live in a world of 'wen lambo, wen moon'. But, is it possible that in a post-gas world, a lambo will drop in value? I hope not. I don't like the idea of fewer choices no matter what may look better over time. But, even though the lambo is a masterpiece, it is still a car. If it can't ever be used as a car, maybe it goes sky high in value because of its scarcity model... or maybe people start reflecting on its beauty followed by a 'thanks but no thanks'. And, I'm not talking about the company. If they remain in decades to come, they will be making the very most awesomest electric cars. But, a true lambo V-12 is a thing of beauty, and it doesn't run on unicorn meat... it runs on gas. Time will tell if rarity moves in its favor or against.

So, Gordon's bottom-line is this; rarity is a value-adding characteristic, if it is the right kind of rarity. If it is rare because the number is finite and everyone wants one, then it is very likely that, here I go again, unless the government blows it up, it is very likely that Bitcoin will keep rising in value over time, and will maintain the minimal liquidity it takes to be worth its rare-ness. If, however, people switch from HODLing, to simply being stuck with what they have, then it means something will have caused the volume to dry up, and it becomes a game of musical chairs playing to a very annoying song. I do not believe that this is the future for the Bit that is coin, but it is the point I hope I have made with this post.

Did I make a point? Hope so.

And with that in mind, Crypto Gordon Freeman, hero to the under-HODL'd, lover of value, storer of thoughts... out.


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Hi! I'm Gordon Freeman (I hear they made a likeness of me in some video game... totally unrelated... or...).


Welcome! This is my blog for all things crypto, from my day trading and tutorials to general crypto news.

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