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Ask CryptoVantage: Will Bitcoin Always Be Vulnerable to 50% Crashes?
It has been hundreds of years since our economy used a free market money, and so our society has become very used to having stable currencies. For example, we are not used to seeing large price fluctuations in the US or Canadian Dollars. However, many people are not aware that our currencies are only stable in the short-term because of government and central bank intervention.
Bitcoin, on the other hand, is often subject to large price fluctuations (also known as high price volatility). Governments and banks cannot control bitcoin to make the price more stable. Because of this, there is the potential that bitcoin will always have some level of volatility that we’re not used to. In this article, we dive into why that is, when the volatility might change, and the benefits of a currency that cannot be controlled by governments.
Bitcoin’s Volatility
One of the most well-known characteristics of bitcoin is its volatility. Bitcoin’s large price swings often make the headlines.
There are many factors that play into bitcoin’s volatility, including speculative investors, adoption rates, bad press, and institutional investors either buying or selling large amounts of bitcoin. Typically, when the price of bitcoin makes a large upwards or downwards movement, the exact cause is difficult to pin-point. However, price swings can become extreme because as the price starts to drop, speculative investors usually sell their bitcoin causing the price to drop further, or as the price starts to increase, more speculative investors hop on board.
To learn more about bitcoin’s volatility, check out “Isn’t Bitcoin Too Volatile to be Useful as a Currency?”
Higher Adoption Rates May Lower Volatility
Bitcoin’s volatility has hindered adoption rates because most people cannot keep a large amount of their savings in a currency with such high volatility – especially if they might need to access and use those funds in the short-term. This lack of adoption affects volatility because it means that large amounts of bitcoin are owned by a smaller number of people or institutions. For example, if one institutional investor who owns a significant amount of bitcoin sells, it can lead to price fluctuations.
If bitcoin were to become the dominant form of currency for a significant portion of the world, more people would be using the currency for saving, spending, and as their unit of account. This increased adoption would likely cause the volatility to be much lower than it is today and 50% crashes would be much less likely to happen. When more people adopt, and use, bitcoin any one event is less likely to cause a big price movement in either direction.
The Benefits of a Currency with No Government Intervention
One of the mandates of the Federal Reserve (the central bank of the United States) is to keep inflation of the US Dollar around 2% every year.
In reality, inflation is typically higher than that. Assuming the Fed hits their 2% inflation target each year, the value of any savings stored in dollars also drops by the same 2% each year. Even if the intentions of the governments and central banks may be honest, using inflation to boost growth hurts long term savers. In contrast, bitcoin has a limited supply of 21 million coins that cannot be increased. Even though bitcoin’s price has been volatile in its early years, it is beneficial to be able to save some of your wealth in an asset that has a supply which cannot be increased.
Key Take-Aways
- Bitcoin is more susceptible to price swings than fiat currencies largely because there is no government intervention to bitcoin’s monetary policy.
- Higher adoption rates will likely help decrease bitcoin’s volatility over time.
- There are benefits to having a currency with no government intervention which can outweigh the volatility risks.
- Bitcoin is not subject to inflation in the same way that dollars are because it has a limited supply which cannot be altered.
