With the Bitcoin price having a mostly upward bias recently, volatility has been a less-cited argument against adoption of crypto-currencies. Much of the chatter about Bitcoin's (lack of) stability seems to have subsided. But while things are calm it's probably worth reminding ourselves that the volatility will in all likelihood return. But also, and more importantly, we should remember that that's okay.
Volatility: Friend or Foe?
Although volatility is clearly not an ideal quality for a currency, it's not necessarily a deal-breaker either. In fact, some have even argued Bitcoin's volatility is a virtue — or, more precisely, that Bitcion's volatility is a reflection of its astounding adoption-rate. And who can complain about rapid adoption, right?
On the other hand, there are those that seem to think the volatility of crypto-currencies is not only a bad thing, but that it's an inherent thing — they think that crypto-currencies (Bitcoin in particular) will always be volatile, no matter the adoption level. Some have even gone so far as to suggest we resolve this “problem” by building “self-regulating” crypto-currencies, so to speak. More specifically, the suggestion is that crypto-currencies could automatically adjust their money-supply based on current price and/or other metrics.
We would view these kinds of efforts as, at least partly, misguided. Not only would such “stability mechanisms” lead to additional software complexity, which can lead to more bugs and vulnerabilities, but there's actually value in Bitcoin's occasional price explosions.
The Bright Side
We wouldn't go so far as to say volatility is a good thing in and of itself, but it might be fair to say it's a necessary “growing pain”. And when it's to the upside it can even be our friend. After all, it's the price that has consistently brought in interest; it's the price that has led to persistent media attention; and it's the price that has driven Bitcoin from a curiosity for a niche of hackers — a niche of a niche — to a global phenomenon that can hardly be ignored by any serious investor or technology buff.
Whether people are buying in because they wanna “get rich quick“ (not ideal) or because they genuinely see the long-term value in the system (preferably), both increase demand for bitcoin, and more demand — all else equal — leads to higher prices.
Bitcoin's history is one of big price spikes followed by periods of decline and consolidation. We should expect that trend to continue as long as (a) the “market-cap” of Bitcoin — the value of all bitcoins in existence — remains well below that of major national currencies and (b) Bitcoin doesn't outright fail. Price increases beget further interest which begets further price increases.
When the speculation gets frothy “weak hands“ must be washed. But once the process is over, we always seem to be a little higher than where we started.
Central Banks Create Stability?
Although it's no surprise to hear a media talking-head or a mainstream economist assert that central banks “provide stability”, it's a little disconcerting to see those in the crypto-currency space (no less a well-known figurehead) espousing the same dogma (even if only implicitly).
Modern-day central banks no doubt pay great lip-service to ”stability“, but the origin of central-banking should cast great doubt about the true motivation behind these institutions. The Bank of England, generally considered to be the prototype of modern-day central-banking, was birthed of a desire to fund ‘government’ operations. More particularly, it owes its existence to a desire to fund war.
Okay, fine: something born of malintent isn't necessarily bad just because its origins were. (Nuclear energy may be an example of that.) But do central banks make currencies stable?
The recent 30% spike up in the Swiss franc, the direct result of actions taken by the Swiss National Bank, is just one counter-example. (That the franc has long been considered a “safe-haven” currency makes it all the more ironic.) And the Bank of England recently gave investors more reason to sell the British pound in the wake of ‘Brexit’.
None of this is proof of anything. But seldom are we given evidence for the efficacy of central banks in providing stablization — much less proof.
To the favor of those suggesting a “stabilization mechanism” for Bitcoin, they are not proposing a centralized institution shrouded in secrecy and beholden to powerful special interests — which would be 100% antithetical to everything Bitcoin stands for. However, they do seem to believe the practice of central-banking actually brought something good to the world, a contention we are very skeptical of.
Embracing the Volatility (For Now)
To sum up, we should expect more volatility in Bitcoin in the future, and we should embrace it; it's got to happen, if we're ever going to have a “real-world” crypto-currency. Consider:
- Crypto-currency, and Bitcoin specifically, is still a very young technology.
- And, crypto-currency is a radical proposal in the face of all previously dominant monetary systems, past and present.
Just remember to keep your wits when the price spikes come. Don't chase the price, and don't put all your eggs in one basket.