To be clear, there is no mechanism, logic or reason (at least revealed to me) why this would be true. Vice versa, increased amount of trading typically increases volatility.
increased amount of trading typically increases volatility.
Define amount. If you mean number of trades, then the effect is decreased standard deviation if the average trade is smaller as a percentage of total market capitalisation. That seems completely logical.
Trading volume. It was taught to me so long time ago and I have thought it so obviously true that I haven't questioned it ever. If you want sources, here is one example (TBH, I only read abstract) I quickly googled. To me, number of trades does not sound a reasonable measure for analyzing markets in macro level, even if for HFT it may be interesting, I know nothing about that.
I am not sure I follow the logic. Bitcoin becomes "bigger" when there are more big actors not using it but just hoarding it? And thus less volatile - until one of these big actors decide to dump their holdings to the thin market used to trade only scraps left from these big actors... Sorry, not convincing.
The idea is that bitcoin is something you prefer over fiat currency in your bank account. The same idea that gold bugs have.
If that's the case, then bitcoin owners will only dump their holdings if a) they fear that the bitcoin network is about to collapse for some reason or b) they need to put the value stored in those bitcoins to use.
It's true everywhere already. Compare the SPY to a large cap stock to a small cap stock, and you'll see tail events decrease monotonically along market cap. Compare BTC to a shitcoin. Compare the USD to a smaller currency. It's known to be a true thing and rather universal. Compare BTC now to many years ago.
The mechanism is that you get flows hitting both sides simultaneously (56 buyers vs 44 sellers) that tend to cancel out, instead of a single player (3 buyers vs 1 seller or vice versa) dominating the flow.
I think you're confusing cause and effect. People value stability, so more money goes into those things. E.g., SPY is an synthetic asset engineered to be lower vol.
I don't think it's at all clear that Bitcoin adoption will go up. It's never been useful as a currency for most people, and Tesla aside, merchant adoption has been in retreat for years. KYC/AML laws are reducing its utility for financial crime. Its only real advantage is in speculation and market manipulation. But both of those depend on volatility.
Large cap stocks weren't engineered for stability, but they're lower tail-risk than mid cap stocks, which are lower tail-risk than small cap stocks, and so on.
The same phenomenon has been broadly true across all markets over all of human history, and the underlying mechanism (heterogeneous flows) is well understood and rather intuitive.
Whether or not BTC adoption increases is not relevant to what I was saying. My only claim is that volatility will decrease if adoption increases, counter to the misplaced scepticism of the post I was replying to
If BTC adoption decreases instead, then volatility should increase, ceteris paribus.
To be clear, there is no mechanism, logic or reason (at least revealed to me) why this would be true. Vice versa, increased amount of trading typically increases volatility.