Bitcoin volatility is too high, but I still continue to hold bitcoin

Is there any friend around you who said that bitcoin is meaningless to you? Perhaps you have witnessed an exponential increase in bitcoin prices and then plummeted. So you abandoned Bitcoin and thought that your friend's point of view was correct. He decided not to pay attention to Bitcoin for the time being and thought it would eventually die out.

But one morning a few years later, when you woke up, you found that Bitcoin did not die, and its value rose a lot again. So you start thinking, maybe your skeptical friend's point of view is not correct?

The list of Bitcoin sceptics is long and many people are famous, but these noises make Bitcoin more vulnerable to vulnerability (from the chaos), because it makes those who use Bitcoin as a means of wealth storage. Don't really understand the characteristics of Bitcoin. Although these features seem to contradict the traditionally established view of the currency, the characteristics of Bitcoin ultimately reinforce their beliefs .

The volatility of Bitcoin is one of its frequently criticized features. Skeptics, including many central banks, generally believe that Bitcoin is too volatile to be used as a value store, transaction medium or unit of account. Given the volatility of Bitcoin, why would anyone use it as a savings mechanism? Moreover, if the value of Bitcoin may fall moderately at any time, how can it effectively become a trading medium for payment?

Currently, the main use of Bitcoin is not as a payment tool, but as a means of value storage . Those who use Bitcoin to store wealth are not spanned by a day, a week, a quarter, or even a year. Bitcoin is a long-term savings mechanism that will only be stable when Bitcoin is adopted on a large scale .

Prior to this, the volatility of Bitcoin was a natural evolution of its price discovery, which was the process by which Bitcoin moved along its monetized path and moved toward full adoption. In addition, most individuals and businesses do not hold bitcoin singly, but use multiple asset combinations, just like any portfolio, which can reduce the impact of the volatility of any single asset. .

No volatility ≠ storage value

To be fair, volatility and value storage are often confused as having mutually exclusive relationships, but not in reality . If the value of an asset is unstable, this does not mean that the asset is an inefficient way of storing value. The reverse is also true, that is, if the value of an asset is stable, then such an asset is not necessarily an effective means of value storage. The dollar is a good example: it is stable (at least for now), but a very bad way to store value.

The decline in the purchasing power of the US dollar since 1982

The Fed is very efficient at depreciating the dollar in a slow way, but what we always remember is that it is a gradual process, and its value has fallen a lot when you suddenly react. Therefore, there is no volatility ≠ with storage value . This is a key psychological barrier that many people encounter when they treat Bitcoin as a currency, and this is largely a function of time.

Although central banks around the world have pointed out that bitcoin is a bad means of value storage and cannot function as a currency due to volatility, they measure bitcoin in days, weeks, months and quarters. Others who are optimistic about Bitcoin look at it from a longer-term perspective: years, decades, and even generations .

Despite these logical explanations, Bitcoin's volatility is still a particularly confusing place for experts: Bank of England Governor Mark Carney said in a recent comment on Bitcoin, measured by currency standards, Bitcoin Being a currency is very unsuccessful, and no one will use it as a trading medium.

The European Central Bank also issued a similar view on Twitter: Bitcoin is “not a currency” but a “very unstable asset” and emphasizes that the central bank can “create a currency for the purchase of assets”. But in fact, the “creating money” function of the central bank is the chief culprit in causing currency depreciation and becoming a means of storing bad value .

Tweets by the European Central Bank

In addition to Mark Carney and the European Central Bank, former Federal Reserve Chairman Janet Yellen and Ben Shalom Bernanke, current US Treasury Secretary Steven Mnuchin and US Zhongtong Donald Trump are all claiming that Bitcoin is a currency (or value store) due to volatility. Means) Defects. But they don't seem to fully realize, or at least are willing to admit, that Bitcoin is actually a direct response to the systemic problem of the government creating money through the central bank . They also don't realize that the volatility of Bitcoin is discovered by its price. Necessary and healthy form .

Fortunately, for all of us, bitcoin is not too volatile as a currency, and experts in these traditional fields are not experts in the field of bitcoin. Regardless of the logic, empirical evidence suggests that bitcoin has proven to be an extraordinary means of value storage for any longer period of time despite the volatility of Bitcoin .

So how do assets like Bitcoin have both high volatility and an effective means of value storage?

The value of bitcoin

Let us think about why people have basic needs for Bitcoin? Why is bitcoin inherently volatile? Bitcoin is valuable because its supply is fixed (21 million pieces) and it is also volatile for the same reason .

The driving force behind the basic demand for Bitcoin lies in its scarcity , its decentralization and anti-censorship (and a fixed supply plan, which halved the block reward every four years), which enhances the credibility of Bitcoin scarcity. This is where Bitcoin has the storage value attribute.

Bitcoin adoption (demand) cycle (left) and bitcoin circulation total trend chart (right)

Although the demand for Bitcoin is increasing by an order of magnitude, since the supply plan for Bitcoin is fixed, the supply does not change as demand increases. The difference between the demand growth rate (variables) of Bitcoin and the supply growth rate (fixed), coupled with the lack of comprehensive understanding by market participants, has led to the volatility of Bitcoin in the price discovery process .

As Nassim Taleb, Nobel laureate in economics, argues in his article The Black Swan of Cairo: “ Change is a message. When change stops, information does not exist. ” As the value of Bitcoin grows, Despite the volatility, it is still transmitting information: change is information. Higher value (depending on change) makes Bitcoin more relevant to new capital and users, triggering a new wave of adoption of Bitcoin.

Bitcoin adoption curve & volatility

The spread of bitcoin-related knowledge and the construction of infrastructure are driving the growth of Bitcoin users, and vice versa . This is a benign feedback loop and the reason why value grows over time.

As the value grows, Bitcoin attracts more potential users, and then they begin to learn the basics of Bitcoin. Similarly, the increase in value will also attract more funds to enter, using Bitcoin as a value storage tool or to build more infrastructure (such as more hosting plans, payment layers, mining hardware, etc.).

Promoting people's understanding of Bitcoin is a slow process, just like building infrastructure, but both processes have contributed to the growth of Bitcoin users, further spreading knowledge and driving infrastructure.

This feedback loop is as follows:

The spread of Bitcoin knowledge → Infrastructure development → Increased adoption → Value growth → Further diffusion of knowledge → Further development of infrastructure

Fixed supply vs. growing demand (left) and bitcoin adoption curve (right)

Currently, Bitcoin is still in its infancy, and the current adoption may not be as much as 1% of the ultimate adoption . For the foreseeable future, the number of new Bitcoin users will reach a new order of magnitude, which will continue to drive significant fluctuations in Bitcoin. However, with the arrival of each new wave of adoption, the value of Bitcoin will reach new heights due to higher demand .

The volatility of Bitcoin will decrease as the user base and adoption increase . In other words, if the number of users of Bitcoin is to reach 1 billion, the adoption will need to be about 20 times higher than the current one, but then every additional 100 million users will only need to increase from the previous adoption. About 10% can be achieved. Although in this process, Bitcoin's supply plan is fixed (one new block is produced every 10 minutes, and the block reward is halved every four years).

Therefore, as long as the adoption of Bitcoin will increase and increase, then the volatility will be inevitable, but in the process, the volatility will naturally decrease slowly .

As Vijay Boyapati, a bitcoin economic commentator, once said: “Some authoritative economists laugh at the volatility of bitcoin, (their tone) as if they could turn something that doesn’t exist into a stable overnight. The form of money; this is really a slippery world."

The adoption curve is a natural evolution model of price discovery, and this process is by no means static. In the development of Bitcoin, people's recognition of Bitcoin will rise, will decline, will stabilize, and then rise again, which is rhythmical. Rome was not built in a day. For Bitcoin, volatility and price discovery are the necessary processes to achieve its great cause .

Bitcoin historical adoption curve

To make a more specific explanation of the relationship between volatility and value, let us look at the latest round of adoption curve from the end of 2016 to 2019.

In the upper left picture, the number of Bitcoin users (adoption) in 2019 has increased 12 times compared with 2016, while the supply of Bitcoin has only increased by 10% compared with 2016; in the right picture, although the price of Bitcoin is higher Volatility, but the total market value of Bitcoin in 2019 has increased tenfold from 2016.

Although the adoption of Bitcoin cannot be truly quantified, a rough but fair estimate is that the number of Bitcoin users has increased from about 5 million in 2016 to about 60 million in 2019 (the demand has increased by about 12 times) However, the total supply of Bitcoin has only increased by 10%.

Of course, during this period, there is a significant difference between the information held by market participants and the capital of admission. With the emergence of a large-scale adoption of bitcoin in history, Bitcoin still maintains its fixed supply plan .

What happens when demand increases by orders of magnitude and supply increases by only 10%? And what happens if you know the number of Bitcoins and the funds you enter are different?

The very logical end result is that Bitcoin has experienced higher volatility and higher value , even if only a small number of new entrants are converted to long-term holders (which is the case). New users who initially bought Bitcoin during the bitcoin boom will slowly accumulate knowledge and turn into people who hold Bitcoin for a long time, thus stabilizing the underlying demand at values ​​well above the previous usage cycle.

Since Bitcoin is new, relatively speaking, the total wealth stored by Bitcoin is still very small (about $200 billion), which makes the rate of change between marginal buyers and sellers (price discovery) in basic demand (volatility) ) occupies a considerable proportion. As the basic demand increases, the rate of change in the basic demand will become smaller and smaller . Over time, the volatility of Bitcoin will decrease after only a few adoption cycles .

How to deal with the volatility of Bitcoin?

If we can accept the volatility of Bitcoin is a natural and healthy dynamic, why does current volatility not inhibit the adoption of Bitcoin into a stable form of currency? The answer is simple: the diversification of asset forms, the theory of portfolio allocation and the time span required .

Bitcoin is a global network through which you can transfer value to anyone in the world, but Bitcoin's current total value is less than $200 billion. In contrast, the market value of only one Facebook company exceeds $500 billion, and the estimated value of US household assets is $125 trillion.

In theory, if Bitcoin does not have any contact with the outside world, then its volatility is a problem; but in the real world, Bitcoin is not. The diversification of assets exists in the form of actual productive assets and other monetary/financial assets, which undermines the impact of bitcoin volatility. In addition, there is also asymmetry of information. For those who understand Bitcoin, more users will arrive in time.

These concepts are obvious to those who have been exposed to Bitcoin, and they also explain the short-term and long-term volatility of Bitcoin, but obviously these concepts are not so obvious for Bitcoin skeptics, they have a hard time understanding Bitcoin. The adoption is not an all-or-nothing proposition.

Although bitcoin will continue to grow in global value storage competition because of its superior currency attributes, the function of an economy is to accumulate capital that makes us live better, rather than accumulating money . Money is just an economic commodity that allows for the accumulation of capital through coordination.

Since Bitcoin is fundamentally a better form of money, it will gain purchasing power relative to poorer monetary assets (and currency substitutes) and increasingly gain market share in economic coordination functions, despite Bitcoin is currently weaker as a trading medium.

Bitcoin may also trigger definancialization of the global economy , but it will neither eliminate financial assets nor eliminate physical assets . In the process of monetizing Bitcoin, these assets will continue to represent the diversification of asset forms, which will reduce the impact of daily fluctuations in Bitcoin.

For example, a 1% bitcoin + 99% dollar portfolio has a higher risk/reward than a gold, US Treasury and S&P 500 index. In addition, Xapo CEO Wences Casares has a small amount of bitcoin in its portfolio. Both examples provide a perspective on how we can manage volatility and risk if Bitcoin experiences significant depreciation or even failure (which is still a possibility).


Bitcoin will become a trading medium over time, but in the meantime, use a depreciating asset (dollar, euro, yen, etc.) and store an appreciation asset (bitcoin), which will be even more To be reasonable. Although some economists and central bank governors are really entangled in this issue.

On the road to full monetization of Bitcoin, Bitcoin will be the first to fulfill its role as a means of value storage. Despite the volatility of Bitcoin, it has proven to be an incredible way to store value. As adoption grows, volatility will naturally decline and Bitcoin will increasingly become a direct trading medium .

Let us look at individuals or businesses that exchange goods and services directly with Bitcoin. These individuals or businesses represent those who first determine that Bitcoin will maintain its value for a specific time frame. Only when the liquidity of Bitcoin gradually shifts from other monetary assets to goods and services, will it be transformed into a trading medium. This is not done overnight. The trading infrastructure is already under construction, but only when enough users first use Bitcoin as a wealth reserve, they will give priority to more substantial investments.

The instability of bitcoin prices and their fixed supply plans will continue to make them short-term volatility, but in the long run, this will push bitcoin prices to stabilize . This is in stark contrast to the ideas held by the Bank of England, ECB President Mark Carney, and the Federal Reserve. This is why Bitcoin is vulnerable to vulnerability. In the field of Bitcoin, there is no morality for the bank, and there is no moral hazard, which maximizes accountability and long-term efficiency.

The central bank controls the short-term fluctuations in currency prices by managing the currency, which will lead to long-term volatility. The volatility of Bitcoin is the natural process of its adoption, which ultimately enhances the resilience of the Bitcoin network and promotes long-term stability.

As Nassim Taleb said in his article "The Black Swan of Cairo":

“Complex systems that artificially suppress volatility tend to become extremely vulnerable while not showing significant risks.”

Author | Parker Lewis

Compile | Jhonny

Source: Unitimes

[The copyright of the article belongs to the original author, and its content and opinions do not represent the Unitimes position. Publishing articles only to disseminate more valuable information]