The argument that Bitcoin is too volatile, or the insinuation that it’s volatility is somehow a negative or a draw back, is one of the oldest and most tired arguments against Bitcoin.
Whenever this complaint is leveled, it’s done from the perspective of the Bitcoin / US Dollar price. Analysts look at the price charts, see Bitcoin dropping from over $60k to below $40k within days (as happened recently) and lament the fact. This crazy volatility! It’s such a terrible thing!
But do yourself a favour and take a step back.
Bitcoin, a new and novel technology invented just over a decade ago, is being priced in a currency with more than a century of governance behind it. And not just any governance, but governance by the largest and most powerful government the world has ever seen.
Bitcoin is in its adoption phase, no more than a few hundred million people worldwide own any Bitcoin whatsoever. A fraction of the world’s population. While the US Dollar is the world’s most well established currency, thanks to the Bretton-Woods agreement following World War 2 and agreements between all major oil exporters to only sell oil for dollars. In exchange for US military protection. Thus traders in Timbuktu buying wool from Australian farmers pay with USD, despite the transaction not happening anywhere near the US. And this has been the case for over half a century.
Now, which one of those two currencies would you expect to be more volatile?
Complaining about Bitcoin volatility is a disingenuous thing to do and, by now, reveals more about the author (and their personal reservations about Bitcoin’s wider societal implications) than it does about Bitcoin. It’s sort of like looking at an aeroplane in 1915, less than 12 years after the world’s first powered flight, and, upon witnessing it crash, complaining that aeroplanes are too unreliable to ever transport people.
Not only that, but it’s a classic case of comparing apples to oranges.
The US Dollar is controlled by a central bank, which is specifically tasked with one primary mandate. Dampen the volatility. And they’re constantly tinkering with their monetary policy, lowering and raising interest rates and buying bonds on the repo market, to name but a few of the cogs in the convoluted US Dollar system.
Not only is it a complex system of levers and controls but, more insidiously, Federal Reserve policies are determined by a handful of bankers. There’s no reason to expect that something that was unthinkable just fifteen years ago (like negative interest rates) will not become a reality.
Bitcoin’s monetary policy on the other hand was locked in at the outset and it’s very simple.
First and foremost, there can only ever be 21 million Bitcoin. No more. At the beginning there was zero Bitcoin in existence and when the network launched the first 50 BTC was issued to the miner who discovered the first block in an open, fair and completely transparent competition that anyone could join. After that another 50 BTC was issued roughly every 10 minutes with every block, amounting to 7,200 new BTC per day. Until, in 2012, the rate of production was cut in half. And again in 2016 and again in 2020. Today only 900 new BTC is issued daily, and that will again be cut in half in 2024. This ‘halvening’ will be repeated roughly every four years, or 210,000 blocks, until, around the year 2140, the total supply reaches a fraction below 21 million Bitcoin, at which point the issuance of new Bitcoin will stop. From that point forward the existing Bitcoin can only ever be divided into smaller fractions, but 1 Bitcoin will always be equal to 1 / 21 000 000 of the total supply.
Plus, this is all recorded in an open open ledger that anyone with an internet connection can verify and check.
That’s it. It’s that simple.
And no one can change it unless the entire network agrees to that change and anyone can participate in the network by running a full node, essentially ‘voting’ on any future changes by running their preferred version of the Bitcoin software.
Looked at from this perspective, pricing Bitcoin in terms of US Dollars isn’t comparing apples to oranges. It’s more like measuring the thrust of a rocket ship in terms of horse power. Both can move stuff, but other than that basic similarity, they couldn’t be more different.
Finally, the Bitcoin price is determined by supply and demand only. Nothing else.
People look at the basic properties of Bitcoin; it’s simple monetary policy, complete transparency of the entire protocol, easy transferability, scarce supply, inflation resistance, apolitical non-agenda, decentralized governance, and high level of security (provided that you assume proper responsibility) and based on those fundamental properties decide whether or not to buy in. And, over time, if there are more buyers than sellers, the price goes up.
So naturally, because there are no manipulative devices built in to dampen volatility, it is going to be extremely volatile in the early phases as it’s being adopted in successive waves of euphoria and panic, coupled with a slow but steadily spreading comprehension of the protocol’s basic mechanics. Until, if it proves successful, it becomes ubiquitous. Only then will it stabilize. Much like the risk of flying became no more than an afterthought when flying became an everyday occurrence.
Writing with the subtle expectation that Bitcoin shouldn’t be volatile and / or that its volatility is somehow a sign of failure or drawback of the technology reveals a bias in the author, translating into an apparent inability to see Bitcoin for what it is and, more importantly, where it’s at in its journey.
There is little written record of gold’s earliest days, Bitcoin’s distant analog cousin. No one knows exactly when it was used to settle a transaction for the very first time. But it took centuries of steadily spreading adoption before it became the world’s most popular currency that endured for over 5,000 years.
Whatever the case may be, it’s highly unlikely that it happened within 12 years.
And more recently, after the Internet was invented in the seventies and introduced into the first households in the mid eighties, who can remember what it looked like by the late nineties? There was no Gmail, no Facebook and no one imagined that they’d ever use a credit card online.
And yet, Bitcoin’s volatility critics insinuate the ludicrous expectation that the world’s first cryptographically created and completely decentralized currency, with no leadership or central control system, should somehow have emerged from its creator’s hard-drive perfectly formed and completely stable.
As the old saying goes, before you can run you have to walk. And before you can walk you have to crawl. Seen from the perspective of a new global reserve currency, Bitcoin is still learning to roll over.
There’s a lot more volatility to come. Get used to it.