The Bitcoin Volatility Paradox

Bitcoins volatility is the result of price discovery and has consistently grown in value since its inception in 2008. Picture Credit: Glassnode

Hi Plebs,

Bitcoin has long been known for its extreme price volatility. The asset's value can swing wildly, sometimes fluctuating thousands of dollars in a single day. This level of volatility seems to fundamentally contradict the core functions expected of money - a stable store of value and reliable medium of exchange.

Given bitcoin's notorious volatility, one would assume that it would be a poor candidate to serve as money. The common refrain among sceptics, especially central bankers, is that bitcoin's volatility makes it unsuitable as a savings mechanism or transactional currency.

How could anyone trust bitcoin to hold its value if its price could plummet overnight?

However, a closer examination reveals a paradox - despite bitcoin's volatility, adoption has continued to grow over the past 15+ years since its inception. This raises an intriguing question: why has volatility not prevented the adoption of bitcoin as money?

The key lies in understanding bitcoin's unique properties that allow it to serve as an exceptional long-term store of value, even if it experiences short-term price swings. Unlike traditional fiat currencies, which can be debased by central bank policies, bitcoin has a fixed supply that is mathematically guaranteed. This scarcity gives bitcoin an advantage as a store of wealth, even if its value fluctuates in the near-term.

Additionally, while bitcoin may be more volatile on a day-to-day basis compared to fiat money, its volatility is often muted when viewed as part of a diversified portfolio. Just as modern investment theory emphasizes the benefits of asset diversification, bitcoin's volatility can be mitigated when it is held alongside other asset classes.

Furthermore, the volatility of bitcoin can be seen as a natural by-product of its ongoing monetization process. As more individuals and institutions adopt bitcoin, the market is expected to become more stable over time. The very properties that allow bitcoin to store value - its fixed supply and decentralised nature - are the same factors driving increased adoption, creating a self-reinforcing cycle.

Cheers, and onwards with Bitcoin