Actually, Bitcoin’s Volatility is What Makes it Successful
There’s no question that Bitcoin holders can be in for a wild ride. Beginning on June 23, 2019, the coin tumbled from $13,868 to $9,711 within a span of two weeks and it’s back up to $13,000 as of this writing. In this article, we’ll discuss what causes Bitcoin’s high volatility, why this turbulence has been essential to its success thus far, and what it could mean moving forward.
The Causes of Volatility
Mention Bitcoin’s turbulent price around the espresso machine and you’re bound to get a dozen different theories about its cause, from difficulty in determining fundamental value and massive speculation to rampant fraud and price manipulation. Let’s take a closer look at some of these explanations.
Fraud and Price Manipulation
Indeed, one does have to be extra-vigilant in the crypto-world, with attackers using everything from old-school phishing and pump-and-dump attacks to fake ICOs and exchanges to cheat you out of your money. However, due to Bitcoin’s high market cap, it is actually far less susceptible to many of these schemes than newer altcoins.
Take, for example, the classic pump-and-dump attack. This is when a group of investors targets a specific coin by purchasing it in large quantities to drive the price up. Once the coin drastically rises in value and it attracts the attention and money of others, the group sells off their coins at the higher price point, laughing as they screw over honest investors. Regulatory bodies monitor for this in the stock exchange, but the unregulated nature of the cryptocurrency market leaves the door open to opportunistic attacks such as these. However, the sheer magnitude of Bitcoin’s popularity protects against this sort of scheme by making it prohibitively expensive to buy a large enough portion of the market to make a substantial difference in price.
Difficulty in Determining Fundamental Value
With cryptocurrency still so new, it’s difficult to determine how much one should be paying for a coin. Stock traders typically take into account a company’s assets and liabilities, potential cash flow, and other factors when determining a stock’s intristic value, but most of these metrics simply don’t apply to Bitcoin. Without a reasonable way to calculate the currency’s fair value, herd mentality can take over and result in massive volatility.
Rampant Speculation
When Bitcoin was rapidly gaining value, many financial planners advised their clients to invest in Bitcoin and other altcoins. However, after the excessive turbulence of 2017, most advisers decided that cryptocurrency was too risky of an investment and urged their clients to steer clear. By taking a large number of buy-and-hold investors out of the market (and certainly not incentivizing institutional investors to join), the market became all the more speculative and volatile. The remaining individual investors tend to hold their coins only until they believe the price has reached a local maximum, at which point they sell in droves and the value plummets. If we are to see a stabilization of Bitcoin’s price in the future, we need to help investors see the currency as a store of value, as opposed to a get-rich-quick scheme.
Without Turbulence, Bitcoin Would be Nothing
Turbulence is a necessary byproduct of any truly decentralized system. According to Edward Fricker, co-founder of TrustlessBank, the world’s first multi-coin lightning network wallet, “If somebody can stabilize the Bitcoin price, that means they can control the network. No price control by 3rd parties means real freedom for all people that use Bitcoin.”
In addition, had it not been for the media coverage surrounding Bitcoin’s meteoric rises and epic falls, how many people would have heard about it? How many would have invested in it or mined it? The truth is that speculation has been a crucial on-ramp into the world of cryptocurrency for millions of users, but the associated volatility will also continue to scare many millions away. If our ultimate goal is mainstream adoption, as many have suggested and recent innovations like the lightning network have encouraged, then turbulence is, in fact, a liability to be overcome.
Stablecoins: The Key to Mainstream Adoption?
Enter stablecoins, cryptocurrencies that are designed to adopt the value of another asset, like a fiat currency or precious metal. The most well-known are Tether and TrueUSD, both of which are designed to assume the value of the US dollar. At present, their main function is to give investors a stable coin to turn to when others are turbulent, while avoiding the high fees and centralization of crypto-to-fiat exchanges and maintaining the extra security inherent to decentralized systems.
“Stablecoins and Bitcoin work very well together; Bitcoin and its younger sister, Ether, create the infrastructure, security, and the market, and stablecoins allow humans and corporations to guarantee a future value,” Fricker said.
In the future, the predictable value of stablecoins might just breed the trust of businesses and everyday consumers, thereby encouraging them to use cryptocurrency in their daily transactions.
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