The cryptocurrency can only become an accepted form of payment if its volatility stabilizes, but that depends on a constant conviction that it represents the future of the money
The volatility of Bitcoin frightens many potential users of the cryptocurrency. This is due to the close relationship between volatility and risk: the higher the level of volatility, the greater the risk associated with the asset. In the same way, however, risk can be a source of attraction: the more volatile the price of an investment, the higher the yield – or loss – that can be obtained from it. These general rules also apply to Bitcoin.
Bitcoin is considerably volatile compared to other assets, but much less volatile than it was before. Over time, fluctuations in the price of the main cryptocurrency have been decreasing in percentage terms. On average, the daily volatility rate (how much the price changes per day) has been mostly below 5% since 2015, compared to an average volatility of 1.2% for gold. In 2016, Bitcoin was less volatile than Twitter shares, and just as volatile as oil.
However, Bitcoin continues to register violent price oscillations. On Wednesday, the cryptocurrency fell USD 2,041 from a daily maximum (and annual peak) of USD 13,880 to USD 11,200, the biggest daily price movement since January 2018.
The volatility of Bitcoin’s price is mainly a consequence of its youth. The first block of the Bitcoin chain, and with it the first 50 bitcoins in circulation, was mined on January 3, 2009. Its money supply has a limit of 21 million bitcoins, of which 17,783,800 have already been issued. .
This means that most cryptocurrencies are still concentrated in a few hands. It is estimated that 4% of users own 95% of the coins, while 1% concentrate half of the entire offer. As a result, Bitcoin’s liquidity is still limited.
During the first years of its existence, Bitcoin behaved like the low capitalization and high risk stocks (penny stocks). Any large buyer, for example the Winklevoss twins, could cause a large price spike.
“As its adoption and liquidity have increased over the years, Bitcoin’s volatility has dropped considerably,” says Vijay Boyapati, a systems engineer and evangelist of Bitcoin.
“When Bitcoin reaches a market capitalization similar to gold, it will show a similar level of volatility, if it exceeds that capitalization, its volatility will be reduced so much that it will allow a widespread use as a means of payment.”
Precisely because Bitcoin is a promise for the future that can only be built over time, it is that the asset has been called a “self-fulfilling prophecy”: Bitcoin can only become an accepted payment option if its volatility stabilizes, but its stability depends on a constant conviction of its investors that it represents the future of money.
If history is a guide, then Bitcoin is well on its way to gradually acquiring the basic characteristics of money.