Bitcoin price & volatility

Bitcoin price & volatility

Read any article written about bitcoin in the mainstream press and odds are, at some point it touches on the incredible volatility of bitcoin’s price.

Indeed, one of the largest barriers to the widespread adoption of bitcoin as a viable global currency is its volatility. It’s impractical that a currency that regularly gains or loses 10% or more of its value in a single day will be adopted as either a means of exchange or secure store of value. However, many commentators incorrectly conflate bitcoin’s current volatility with some structural, underlying flaw in bitcoin itself.

Like any other currency (or stock, bond or commodity), bitcoin is subject to market coerces and consequently, continuous fluctuations in price. What complicates matters is that at any given time there are potentially hundreds of factors that contribute to bitcoin’s exchange rate, not least of which being erratic human behavior. This makes it exceptionally challenging to come to a unified understanding of what bitcoin’s price should be today, tomorrow or a year into the future.

The objective of this overview is not to suggest any analysis of the drivers of bitcoin’s current or historic price, nor is it to provide any specific guidance for bitcoin’s price going forward. Instead it will lay out our perspective on bitcoin’s adoption trajectory, and provide some hopefully useful analogs for how to think about bitcoin’s price volatility in the context of other global currencies.

Over the last forty five years, most countries have generally adopted “floating exchange rates” for their currencies, a system in which a currency’s value is permitted to fluctuate with supply and request. I’m sure you often hear about “a feeble Yen” or “a strong Dollar”; this is describing the ever-changing value, and exchange rates of different national currencies.

Take the very real-world example of the Euro. Inbetween September two thousand and May two thousand eight it gained as much as 95% against the US Dollar. Then, inbetween May two thousand eight and March 2015, it promptly lost 35% of its value. Similarly, exchange rates for the top five global currencies (US Dollar, Euro, British Pound, Japanese Yen and Swiss Franc), all fluctuate, sometimes significantly, over the course of week or month.

In fairness, the above comparison is not intended to downplay bitcoin’s roller coaster spectacle over the past several years. Bitcoin’s appreciation from effectively zero in 2009, to USD 1,163 in November 2013, and then back down to USD one hundred sixty seven in January two thousand fifteen was certainly a wild rail. It was not, however, totally unexpected, and should not be viewed with any more skepticism than you might give an entirely fresh currency in its very first few formative years.

Like any other currency, bitcoin’s price is driven by monetary supply and request. Individuals are willing to pay a particular price to exchange an amount of their home currency (whether it be US Dollars or or Ukrainian Hryvnia) for an amount of bitcoin based on how much value they see in it (request) and how many units are in circulation (supply).

With respect to supply, the number of bitcoins presently in circulation as well as the total number of bitcoins that will ever be in circulation are both known quantities. Bitcoin monetary supply expands at a predictable rate, and will cap at 21,000,000 bitcoins at or near the year 2140. Both attributes are entirely by design, and make understanding the supply side of bitcoin relatively straightforward.

What is far more complicated, and infinitely more significant to driving bitcoin’s long-term pricing stability is its request.

For a currency to be valuable there needs to be significant and stable request for making purchases denominated in that currency. Take the US Dollar: the US Dollar is valuable and relatively stable, among a multiplicity of reasons, because individuals and businesses need US Dollars to purchase goods and services in the United States. When a tourist wants to buy a hamburger, they need to exchange their home currency for US Dollars. When a business wants to build a fresh factory it needs to buy equipment and pay fresh workers in US Dollars. The more request there is for US Dollars, all else equal, the higher the exchange rate will be.

In comparison, bitcoin presently faces relatively low and uncertain request. Today, of the millions of people holding bitcoins worldwide, only a petite fraction are doing so as a means to purchase goods and services. The vast remainder are holding bitcoins purely as a speculative investment with little intention of ever spending. Thus, the current, volatile price of bitcoin, whatever it may be, is less a representation of the overall health of the bitcoin ecosystem and more a symptom of isolated trading activity.

What will eventually bring significant appreciation and stability to bitcoin will have to be enhanced adoption of bitcoin by consumers and merchants and growing forward optimism around bitcoin’s utility as a secure store of value. As such, the lighter it is for someone to pay for a meal at a restaurant or send money to a friend in bitcoin, the more request for bitcoin will increase. We are beginning to see signs of such adoption, but may still have a ways to go in reaching a point where bitcoin can sustain a relatively high, stable price over the long-term.

Bitcoin price & volatility

Bitcoin price & volatility

Read any article written about bitcoin in the mainstream press and odds are, at some point it touches on the incredible volatility of bitcoin’s price.

Indeed, one of the largest barriers to the widespread adoption of bitcoin as a viable global currency is its volatility. It’s impractical that a currency that regularly gains or loses 10% or more of its value in a single day will be adopted as either a means of exchange or secure store of value. However, many commentators incorrectly conflate bitcoin’s current volatility with some structural, underlying flaw in bitcoin itself.

Like any other currency (or stock, bond or commodity), bitcoin is subject to market coerces and consequently, continuous fluctuations in price. What complicates matters is that at any given time there are potentially hundreds of factors that contribute to bitcoin’s exchange rate, not least of which being erratic human behavior. This makes it amazingly challenging to come to a unified understanding of what bitcoin’s price should be today, tomorrow or a year into the future.

The objective of this overview is not to suggest any analysis of the drivers of bitcoin’s current or historic price, nor is it to provide any specific guidance for bitcoin’s price going forward. Instead it will lay out our perspective on bitcoin’s adoption trajectory, and provide some hopefully useful analogs for how to think about bitcoin’s price volatility in the context of other global currencies.

Over the last forty five years, most countries have generally adopted “floating exchange rates” for their currencies, a system in which a currency’s value is permitted to fluctuate with supply and request. I’m sure you often hear about “a feeble Yen” or “a strong Dollar”; this is describing the ever-changing value, and exchange rates of different national currencies.

Take the very real-world example of the Euro. Inbetween September two thousand and May two thousand eight it gained as much as 95% against the US Dollar. Then, inbetween May two thousand eight and March 2015, it promptly lost 35% of its value. Similarly, exchange rates for the top five global currencies (US Dollar, Euro, British Pound, Japanese Yen and Swiss Franc), all fluctuate, sometimes significantly, over the course of week or month.

In fairness, the above comparison is not intended to downplay bitcoin’s roller coaster spectacle over the past several years. Bitcoin’s appreciation from effectively zero in 2009, to USD 1,163 in November 2013, and then back down to USD one hundred sixty seven in January two thousand fifteen was certainly a wild rail. It was not, however, entirely unexpected, and should not be viewed with any more skepticism than you might give an entirely fresh currency in its very first few formative years.

Like any other currency, bitcoin’s price is driven by monetary supply and request. Individuals are willing to pay a particular price to exchange an amount of their home currency (whether it be US Dollars or or Ukrainian Hryvnia) for an amount of bitcoin based on how much value they see in it (request) and how many units are in circulation (supply).

With respect to supply, the number of bitcoins presently in circulation as well as the total number of bitcoins that will ever be in circulation are both known quantities. Bitcoin monetary supply expands at a predictable rate, and will cap at 21,000,000 bitcoins at or near the year 2140. Both attributes are entirely by design, and make understanding the supply side of bitcoin relatively straightforward.

What is far more elaborate, and infinitely more significant to driving bitcoin’s long-term pricing stability is its request.

For a currency to be valuable there needs to be significant and stable request for making purchases denominated in that currency. Take the US Dollar: the US Dollar is valuable and relatively stable, among a multiplicity of reasons, because individuals and businesses need US Dollars to purchase goods and services in the United States. When a tourist wants to buy a hamburger, they need to exchange their home currency for US Dollars. When a business wants to build a fresh factory it needs to buy equipment and pay fresh workers in US Dollars. The more request there is for US Dollars, all else equal, the higher the exchange rate will be.

In comparison, bitcoin presently faces relatively low and uncertain request. Today, of the millions of people holding bitcoins worldwide, only a petite fraction are doing so as a means to purchase goods and services. The vast remainder are holding bitcoins purely as a speculative investment with little intention of ever spending. Thus, the current, volatile price of bitcoin, whatever it may be, is less a representation of the overall health of the bitcoin ecosystem and more a symptom of isolated trading activity.

What will eventually bring significant appreciation and stability to bitcoin will have to be enlargened adoption of bitcoin by consumers and merchants and growing forward optimism around bitcoin’s utility as a secure store of value. As such, the lighter it is for someone to pay for a meal at a restaurant or send money to a friend in bitcoin, the more request for bitcoin will increase. We are beginning to see signs of such adoption, but may still have a ways to go in reaching a point where bitcoin can sustain a relatively high, stable price over the long-term.

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