[Bit]coin flipping: There’s a solution to Bitcoin’s volatility
Complicated and easy solution image via Shutterstock
If you were to choose between a lower reward and a higher risk, what would you choose? If you chose the first option, you’re in luck. There’s a way to go around volatility and make sure your reward does not diminish each time the Bitcoin price increases or decreases abruptly.
Akbar Thobhani, the CEO and co-founder of SFOX, a company which promises to make it easy for enterprises to trade Bitcoin, announced in a guest post for Bitcoin Magazine that his company has found a way to diminish one of Bitcoin’s main challenges —its volatility. SFOX proposes a time-weighted average price algorithm which should get users closer to TWAP (time-weighted average price); it is basically the average price of one Bitcoin during a specific timespan.
Henry Brade, the CEO of Finnish Bitcoin startup Prasos Oy, told JAXenter after the Bitcoin halving that the company’s exchange services were clearly affected by this occurrence.
We are seeing increasing trading volumes and in fact our services did their all-time high trading volumes in June. Our previous record dates back to December 2013 when the Bitcoin price reached its all-time peak.
Thobhani explained in the guest post that traders often use average price as a benchmark, but a massive minus is the fact that one may not be able to trade on those particular prices (due to lack of tools), which leads to an even higher risk. The algorithm suggested by SFOX could solve the volatility issue.
How one algorithm could solve Bitcoin’s volatility problem
According to the co-founder of SFOX, this algorithm trades over a specific timespan —either 1, 6, 12 or 24 hour(s)— and generates a TWAP over that period. The company ran simulations on various days with low and high volatility and concluded that the difference between the TWAP algorithm and VWAP and TWAP in the simulations was small.
However, there is one detail that could scare traders away from this algorithm, namely the fact that the risk goes hand in hand with the reward: if the former decreases, the latter decreases as well. Although this solution may not be ideal for those who prefer to take big risks and win big, it might be good idea to try it if you are trading more than a few bitcoins.