Read now to learn how there's much more to Bitcoin's volatility than critics and the media would have you believe.
Bitcoin spends a lot of time in the news. More so during “bull runs”, but it’s still a mainstay of mainstream media even when times are tough. One topic that newscasters and influencers seem to be unable to ignore is Bitcoin’s “volatility”.
Bitcoin has been priced from its inception and all the way through the current day in fiat terms. While I believe firmly that a Bitcoin-based economy is well on its way, the reality is that the world still runs on government money.
Nowhere is Bitcoin’s volatility more apparent than in its exchange rates with fiat. In the early days of Bitcoin, you could acquire Bitcoin in exchange for a few pennies, either by expending electricity through mining or by finding someone on the Bitcoin forums willing to make a trade. But these days acquiring a whole Bitcoin, either through mining or on an exchange, will set you back thousands of dollars.
That level of growth in value is nearly unheard of. Bitcoin’s growth in value has been anything but linear though, especially on shorter time frames and when priced in fiat terms. For example, the chart at the top of this article shows Bitcoin’s “price” in U.S. dollars over the past month. With charts like that, it’s not hard to see why people think Bitcoin is volatile. But understanding Bitcoin’s “volatility” is much more complex than reading a fiat-based price chart.
Bitcoin’s Volatility Is The Sum Of Its Parts
There are a large number of reasons why Bitcoin is so volatile, but let’s look at a few of the bigger contributors together:
Bitcoin Usage Has Exploded
When the idea for Bitcoin was originally conceived there was only one person who believed it had value, or just a small group of people, depending on whether Satoshi Nakamoto, Bitcoin’s enigmatic creator, was one person or several. But in the years since its creation, the number of people using Bitcoin to spend and to save has exploded into the tens of millions, maybe more.
Through all that though, the number of available Bitcoin has stayed the same. There were 21 million Bitcoin on day one and there are 21 million Bitcoin today. So to a certain degree, Bitcoin’s upward volatility is simply a function of the economic principle of supply and demand. In other words, as the supply of Bitcoin stays the same while the number of people who demand to use it increases, its per unit value explodes upwards.
People Spend Their Bitcoin
Not everyone “hodls” their Bitcoin forever. In fact, the thought of doing so goes against the very concept of using Bitcoin as money. After all, the point of making money is to eventually spend it for something we (or maybe our descendants) want or need.
Some of Bitcoin’s volatility indeed comes down to the fact that people spend it. Even more so when times get tough. For example, during an economic downturn or when someone loses their job, do you think people value Bitcoin more than the bread that keeps them fed or the roof that gives them shelter? I think not.
People Treat Bitcoin Like An Investment
Bitcoin has no board of directors. It has no team of executives. It has no employees. Bitcoin has no team controlling how it will grow and develop.
Bitcoin also has no earnings. It provides no service other than offering final settlement of economic value, and the fees earned for that service accrue to the Bitcoin users who choose to mine, not to the Bitcoin blockchain itself.
All this to say that Bitcoin is not an investment. Bitcoin is money.
Even so, it’s extremely common to see people compare Bitcoin to investment assets like stocks, bonds, and real estate, and they use Bitcoin as an investment. So a lot of Bitcoin’s volatility is owed to the fact that people tend to liquidate their Bitcoin holdings at the same time they liquidate their investment portfolio.
Bitcoin Isn’t Manipulated Like Fiat
I can always count on Central Banks to produce content like the above that gives me a laugh and proves my point.
The reality is that all monies are volatile to some degree all the time. But all other monetary instruments have someone manipulating their value, like central banks do with their fiat currencies.
Bitcoin has no one manipulating its value across the entire ecosystem. So I believe it’s incorrect to say that Bitcoin is more volatile than fiat. It’s just that a lot of fiat’s volatility happens without us even knowing it’s there.
The Sum Of Bitcoin’s Volatility
Bitcoin is pure money, in that it isn’t tainted by the control or manipulation of others. And that means that its value will likely always fluctuate in direct relation to the changing goods and services that we choose to create. But before you allow yourself to be chased away from Bitcoin by its “volatility”, I invite you to think critically about what that volatility really is and what it means for you.
Scams.
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Shady companies that will take away your hard-earned money the first chance they get.
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This is not financial or business advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.
