You're all making great points but what I'm repeatedly finding confusing in this discussion, is the comparison between a 1.5% pa and 'daily' volatility. Isn't this comparing apples and oranges? Isn't this conflating the daily with the long-term? I mean, if one is holding long term, what do they care about the daily percentage fluctuation? They are holding long term.. They are happy for whatever 'long term gains' made by steem, and ostensibly they are happy for the 1.5% to sweeten the pot. I just find this repeated comparison confusing.
You are viewing a single comment's thread from:
Very good question
Best way to describe this is that the market generally views that there's a financial cost to assuming volatility, as volatility is a form of risk, and all other things being equal, people are risk adverse. I'll copy a excerpt from the wiki page:
If you look at the Black-Scholes model, the financial formula used to calculate prices for all derivatives, volatility has a relatively high price. I think in an intuitive sense, this basically means that generally, people who look at the price of Steem and notice that it zoomed from 20c to $4, plummted to 7c, then pulled back up to 30c within a span of 10 months and are still honestly considering it to be a worthwhile investment, are highly unlikely to be swayed one way or the other by the extra 1.5% yearly interest payment. That is to say, they've assumed the extraordinarily high risk of a high likelihood to lose all their money in the hope that they make a killing, and deem, I think quite rationally, that an extra 1.5%pa interest won't save nor deter them. Yet this 1.5%pa payment is coming at the cost of $1000,000 a year now, which I think is a waste as it provides next to no added incentive.
I sort of know what you're coming from, volatility can seem like an isolated issue that I'm confounding with interest in an attempt to trivialize the latter. That if two things have an expected value that is equal, in the longer term it doesn't matter and any interest on top of it is a separate benefit and should be seen as such. But generally the market does not see it this way. An interest payment on something with low volatility is worth far more than the same interest payment is on an asset with high volatility, even if the expected return of those assets are equal. It is a little arbitrary in the sense that it's not a law of physics but an aggregate measure of human desire. Interest payment is exactly the same, generally we're partial to having money today rather than tomorrow which is why positive interest incentives are necessary. Just as generally we're partial to low rather than high volatility. If we all woke up tomorrow valuing delayed gratification more than instant gratification and higher uncertainty over lower uncertainty, the numbers in the models will change to reflect this market.
I hope the example above sheds a bit of light on this. I'm not a finance/econ expert but hit me up on chat if you have further questions and I'll try to answer them.
Thanks for your reply. That was very insightful. I'm nowhere near a finance/econ expert, but since being in crypto I've learned far far more than I ever thought I would about these topics.
Thanks a lot for keeping an open mind =)
The closed one won't open anything.. ;)