Is Bitcoin Actually Too Volatile?

Is Bitcoin Actually Too Volatile?

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Bitcoin has been a topic of conversation for several years, and its price volatility has been a key point of concern among skeptics, including central bankers. They argue that Bitcoin’s volatility makes it unsuitable as a store of value, medium of exchange, or unit of account. This raises questions about why anyone would choose to hold Bitcoin as a savings mechanism, and how it could be used effectively as a transactional currency for payments if its value could drop significantly at any moment.

Understanding Bitcoin Volatility

Bitcoin volatility refers to the degree of variation in Bitcoin’s price over a specific period. Simply put, it is the rapid and unpredictable change in its value. Bitcoin is known to experience significant price swings, which can range from a few hundred to thousands of dollars in a day. For instance, on April 13, 2021, Bitcoin’s price dropped from $64,000 to $51,000 within 24 hours, causing panic in the market.

Factors Influencing Bitcoin Volatility

Several factors contribute to Bitcoin’s volatility. The following are some of the most significant ones:

Market demand and supply: Bitcoin’s price is driven by market demand and supply. If there is a high demand for Bitcoin, its price will rise, and vice versa.

News and media coverage: Bitcoin’s price is also influenced by news and media coverage. Positive news can lead to an increase in demand, while negative news can lead to a decrease in demand, causing the price to drop.

Regulatory changes: Regulatory changes can significantly affect Bitcoin’s price. For example, when China announced a crackdown on Bitcoin mining and trading, its price dropped significantly.

Market manipulation: Bitcoin’s price can also be manipulated by individuals or groups. Market manipulation can lead to rapid price swings, causing panic in the market.

The perception of Bitcoin can vary widely depending on one’s viewpoint. Some people see it as a high-risk, volatile asset, while others view it as a low-risk store of value. Detractors cite its volatility and lack of regulation as reasons for caution, while Bitcoin enthusiasts argue that its finite supply and decentralized structure make it a secure store of value. As a Bitcoin enthusiast, I would like to elaborate on why I consider Bitcoin to be a low-risk investment.

Early day adoption

New technologies often begin in a volatile way. For example, in the early days, Amazon experienced many large drawdowns, including a 93% drawdown. Internet stocks and biotech stocks are also known for their volatility. Similarly, automobile and airline stocks were extremely volatile in their early days.

The adoption of new technologies is never a smooth, straight line upwards. This is also true for Bitcoin, which has experienced its own share of volatility and fluctuations in price.

Bitcoin supply is inelastic

Bitcoin has a fixed maximum supply of 21 million, which means that the supply is inelastic. A higher Bitcoin price cannot increase the amount of Bitcoin that is mined.

This is in contrast to commodities, where if demand goes up, more of the commodity can be produced. In the case of Bitcoin, if demand goes up, extra Bitcoin cannot be created.

The demand for Bitcoin depends on macro factors such as adoption, usage and interest rate. As more people start to use Bitcoin and accept it as a form of payment, the demand for Bitcoin increases, which can drive up the price. However, the supply of Bitcoin remains fixed, which means that the price can be highly volatile.

It is illogical to expect low volatility from Bitcoin as it is not yet considered as money.

Critics of bitcoin often raise concerns about its volatility, but this is based on the assumption that bitcoin is already widely accepted as money. However, the reality is that bitcoin is still in its early stages of adoption, and its value is largely driven by speculation rather than its use as a medium of exchange.

The true test of whether bitcoin is good money depends on both its technical properties and its social properties. While bitcoin has strong technical properties such as scarcity, divisibility, recognizability, and portability, its social properties are still developing. A large network of people needs to use bitcoin to trade goods and services with each other for it to be considered good money.

Money with poor technical properties but a strong network effect, like the USD, can still be considered poor money because it is losing purchasing power and making people poorer over time. In contrast, bitcoin has the potential to be good money because it is not controlled by a central authority and has a decentralized network that cannot be eliminated.

The current volatility of bitcoin is a reflection of its early stages of development as a currency, and it is not logical to expect it to be stable until it gains wider acceptance as money. As more people adopt bitcoin and use it for transactions and store of value, its volatility may decrease, and it may become a more stable store of value and medium of exchange.

Bitcoin’s volatility is not a reason to dismiss it as a potential form of money. Its value will naturally become more stable over time as it gains wider acceptance and use. It is important to focus on bitcoin’s technical and social properties, and its potential to be a decentralized and independent currency that can help humanity prosper.

The development of any currency from the free market inherently leads to volatility.

When gold was first discovered as a form of money, it too was volatile and risky to use as payment because its value depended on other people accepting it as payment. However, over time, as more people began to accept gold as a medium of exchange and store of value, its value became more stable and reliable.

Similarly, any money developed from the free market will inevitably be volatile in the early stages of adoption. This is because the value of money is largely determined by supply and demand, and in a free market, these factors can fluctuate widely based on a variety of factors such as market sentiment, regulatory changes, and technological developments.

However, over time, as more people begin to adopt and use the currency, its value can become more stable and reliable. This is because the demand for the currency becomes more established, and its use becomes more widespread.

Moreover, the development of new technologies and solutions can also help to address some of the challenges and limitations that may hinder the adoption and stability of the currency. For example, in the case of Bitcoin, the Lightning Network and Segregated Witness are two solutions that have been developed to address scalability and high transaction fees.

Any money developed from the free market is likely to be volatile and risky in the early stages of adoption, over time, it can become more stable and reliable as more people begin to accept and use it as a form of currency. The development of new technologies and solutions can also help to address some of the challenges and limitations that may hinder its adoption and stability.

Bitcoin: A Free-Market

Bitcoin is a decentralized digital currency that operates on a peer-to-peer network without a central authority. This makes it one of the most free markets in existence, as there are no regulatory bodies controlling its supply, demand, or exchange rate. Another unique aspect of Bitcoin is that it can be traded 24/7, unlike traditional financial markets that have specific hours of operation. This means that Bitcoin traders can buy and sell the currency at any time, including on weekends and holidays.

Bitcoin is also not limited to a single exchange, unlike many other financial instruments that are traded on specific platforms. This allows for greater flexibility and competition, as traders can choose from a variety of exchanges that offer different features and trading pairs.

Bitcoin has no circuit breakers, which are mechanisms used by traditional stock markets to halt trading during times of extreme volatility. While this can lead to greater price swings, it also means that Bitcoin traders have greater freedom to make trades without worrying about their orders being automatically canceled. Unlike many traditional financial markets, Bitcoin has no lockdowns, meaning that trading can continue even during times of crisis or upheaval. This can make it an attractive option for investors looking for a safe haven during uncertain times.

Bitcoin has no government bailout mechanism, which means that investors are solely responsible for the risks associated with holding the currency. While this can be seen as a disadvantage, it also means that Bitcoin operates on a more level playing field, without the government interference or market distortions that can occur with other financial instruments.

Bitcoin served as a shelter during the banking crisis.

During banking crises in the United States, there is evidence to suggest that Bitcoin has acted as a safe haven asset and a store of value. For instance, in March 2023, during a banking crisis, Bitcoin’s value surged from $20,000 to $28,000 USD. This increase in value was concurrent with heightened economic uncertainty and volatility in traditional financial markets, causing some investors to perceive Bitcoin as a potential hedge against traditional financial instruments and a secure store of value.

The progress of bitcoin adoption is not accurately reflected by its price volatility.

Bitcoin is a cryptocurrency that has experienced significant price volatility over the years. Despite this, the adoption of Bitcoin has been steadily increasing, with more merchants and businesses accepting it as a form of payment, and more individuals using it as a means of exchange and store of value.

The price of Bitcoin is largely driven by market sentiment and demand, which can be influenced by various factors such as media coverage, regulatory changes, and institutional investment. This means that the price of Bitcoin can be highly volatile, even when its adoption is increasing.

However, the adoption of Bitcoin can be measured by other indicators such as the number of wallets and users, the number of transactions conducted using Bitcoin, and the number of businesses accepting it as payment. These metrics show that the adoption of Bitcoin is steadily increasing, even when the price is experiencing volatility.

Moreover, the progress of Bitcoin adoption is also affected by the challenges and limitations that it faces, such as scalability and high transaction fees. These challenges may hinder the adoption of Bitcoin in the short term, but the development of new technologies and solutions such as the Lightning Network and Segregated Witness may help to address these issues in the future.

While the price of Bitcoin can be highly volatile, it does not necessarily reflect the progress of its adoption. The adoption of Bitcoin can be measured by various indicators such as the number of wallets, users, transactions, and businesses accepting it as payment, which show that it is steadily increasing despite the price volatility.

Conclusion

Currently, Bitcoin secures a value of approximately 545.77 billion dollars. In comparison, the stock market, bond markets, and real estate market are all in the range of 100 trillion dollars. This means that Bitcoin is relatively small in comparison and can be thought of as a tide pool, while equities, bonds, and real estate are like the ocean.

When the ocean moves into and out of a tide pool, it creates a lot of volatility. Similarly, when the larger markets, such as equities, bonds, and real estate, have fluctuations, it can also affect the value of Bitcoin, leading to volatility.

However, as the market cap of Bitcoin grows, it will become more stable and less susceptible to these fluctuations. As more investors and institutions start to adopt Bitcoin, the market cap will continue to grow, and the volatility will subside.

Disclaimer:

Cryptoetf.in is an informational and educational platform for Bitcoin and Blockchain. The information provided on this website is intended for general knowledge purposes only and should not be considered as financial advice. Any opinions expressed on this platform are solely those of the authors and do not reflect the views of any other entities. Investing in cryptocurrencies, blockchain and related technologies carries a high degree of risk and may result in significant financial loss. It is crucial to conduct thorough research and seek advice from a financial professional before making any investment decisions. cryptoetf.in will not be held liable for any losses or damages arising from the use of information provided on this platform. Additionally, while cryptoetf.in strives to provide accurate and up-to-date information, it cannot guarantee the accuracy of information obtained from external sources. cryptoetf.in will not be held responsible for any errors or inaccuracies in the information presented on this platform.


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