Bitcoin�s Volatility: Flaw or Feature?


The Wall Street Journal’s Paul Vigna and Michael J. Casey, in their BitBeat column, offered up this observation on Bitcoin’s volatility: “After Wednesday’s stunning 16.42% gain in bitcoin’s price, the market�has understandably taken a breather Thursday � and in the context of classic bitcoin volatility, a 6.0% decline can truly just be �seen as a “breather.””

Vigna and Casey can be forgiven for scoffing a little at Bitcoin’s volatility. It is indeed that. On the other hand, people like Mark Williams like to use Bitcoin’s volatility as a core criticism of the technology in their efforts to discredit it. Williams at the beginning of 2014 famously predicted that Bitcoin would crash in price back to 10 dollars. Although its price has suffered massively since the artificial highs (due partly to trading bots on the now defunct Mt. Gox), it is still trading at far higher price than it was a year and a half ago.

The fact is, though, that at this point in Bitcoin’s development, volatility is not a flaw, it’s a feature. In order to fulfill its potential as an alternative, international currency and store of value, it is going to have to increase in value many times over. Its current market cap of 5.5 billion dollars is small enough to be owned entirely by a single wealthy individual, so a hundred or thousand times increase is not unreasonable, if you believe in the technology behind it.

It’s a ridiculous proposition that Bitcoin would be able to achieve such a market cap on a smooth glide � rather, it will see ups and downs. And with an unfamiliar technology, with state regulators gearing up to intervene, with professional traders getting ready to such what wealth they can through short selling, it’s no wonder that Bitcoin is volatile, and will continue to be so.

What that means is that, for the time being at least, price is something to check out of curiosity, but not out of any real need to know whether Bitcoin is trending up or down today. It is trending up in the long term.

If you are a merchant and can’t handle Bitcoin’s volatility for your receipts, no problem: Coinbase or Bitcoin will happily integrate Bitcoin into your payment options, and settle with you in cold, hard cash.

If you are an investor and need to double your money by next week, next month, or even next year, best to find another investment. You may hit the lottery or the poor house, and in my book, that’s not a bet worth taking. But, if you are a saver and think it’s a good idea to have a diverse portfolio with a few risky assets that just might pay off big, one or two bitcoins sitting in a digital wallet and left untouched for five or ten years might be all you need.

The volatility that Bitcoin is experiencing now is not unique to Bitcoin: gold is volatile, IBM stocks are volatile, and even the exchange rate of the dollar is volatile. For Bitcoin, its volatility is likely to work in its favor in the long run. It’s useful, it’s innovative, it’s disruptive, and it has plenty of room to grow.

Have an opinion? Leave a comment or write me at [email protected].