Audio by @DelioPera
“Bitcoin is too volatile” is not a legitimate criticism of Bitcoin. Here’s why.
It’s certainly true that the fiat price of Bitcoin, especially recently, is volatile. But, I object to the word “too” in the title.
“Bitcoin is volatile” – yes. “Bitcoin is too volatile” – no. Allow me to explain.
Bitcoin is not money yet, so expecting volatility to be low is illogical.
You will hear Bitcoiners say, “1 bitcoin = 1 bitcoin”, which is an objection to the comparison of Bitcoin’s value to USD’s value. I’m a Bitcoiner, and I’m on the ‘Bitcoin-haters’ side with this specific point, although it’s fun to join in with the memes – and I do. It’s not meant to be taken too seriously and focusing on fighting that meme is not useful.
The volatility of Bitcoin is a problem particularly if you hold the position that Bitcoin is already good money. This is the crux of the issue: Is Bitcoin good money? Logically, good money not only needs to have good TECHNICAL properties (scarcity, divisibility, recognisability, portability etc), but also good SOCIAL properties; ie, a strong network of people that use it as money to trade goods and services with each other. (To see more on this, read Appendix A, taken from my article, Bitcoin has no intrinsic value: Debunked.)
Even if a money has nearly perfected the technical properties, but has no network effect (a social property), it is still poor money. Why? Because the purpose of money is to use it in trade to overcome barter. If the people you trade with don’t use the money, it’s poor money, no matter how good its technical properties are.
Conversely, a money that has horrible technical properties, but is still widely used (eg USD), is poor money. One might argue it can’t be poor money if many people choose to use it. That would be true, except that people don’t choose to use USD, they are forced to use it. Why that is, is a whole other discussion I won’t go into now, but I will say this:
USD is poor money. It is controlled by The Federal Reserve (not federal, and not a reserve; it is a privately owned institution), and they create USD out of nothing. There is no cost to producing more (they certainly don’t work for it), and in doing so, they steal from: A) everyone storing their value/time/labour/energy in it or B) those who have negotiated contracts or wages in it. The purchasing power has declined by 99% since The Federal Reserve began.
If money that everyone uses is making everyone poorer, then I would argue that that is sufficient to label it as poor money. Money, by overcoming barter, makes humanity prosperous. USD is doing the opposite; it is holding humanity back.
Expecting Bitcoin to be good money right now is unreasonable.
I don’t want to get caught up on good vs bad money. I mentioned it because one could argue that Bitcoin is not effective at being money now (volatility among other reasons), and therefore it is not money. But, that is dismissing the fact that Bitcoin is BECOMING money, and has all the technical properties NOW to be money – it just requires time to gain the social properties.
Bitcoin is an incredible discovery because it allows, for the first time in human history, a digital money not issued by a central authority and not controlled or changeable by any one person or group. That alone is quite remarkable, but in addition to this, it grew from grassroots sources, developed a massive decentralised network and can no longer be eradicated by forces that intend to maintain control of the world’s money supply.
To not be grateful for this, and to demand that the world should be using Bitcoin as money now, otherwise it is useless, is intellectually dishonest or grossly ignorant. It’s wrong to not allow Bitcoin to evolve into money over time. It’s wrong to expect it to be money immediately.
Any money of the free market (ie not forced to be valued by government – fiat money) evolves naturally in a general process listed below (explained nicely by Vijay Boyapati’s excellent piece, The Bullish Case for Bitcoin):
- Store of value (SoV)
- Medium of exchange (MoE)
- Unit of Account (UoA)
While there can be some overlap, for example, something that is stored may be exchanged, the flow is generally from steps 1 to 4. If people hold a unit for its SoV, it will inevitably be used a little as a MoE in a barter society. The MoE usage then increases the SoV properties of the unit, which increases the MoE properties, and so on, in a positive feedback loop towards monetary evolution from barter, and UoA ascendency.
Any money developing from the free market necessarily will be volatile.
When gold was discovered as money, it too was volatile! It too was risky to accept as payment because its value depended on other people accepting it as payment. That’s just how free-market money starts. It takes time to develop. If only we could go back in time to the evolving stages of gold as money, and tell our ancestors to accumulate it before anyone else knew it would be money, so that we may today reap the benefits in the present. Well, here we are today, in the middle of a new money being discovered, and people are rejecting it because it is too volatile to be used as money today – do we really need our descendants to time travel back to now, and tell us what to do?
Compare this monetary evolution of gold with fiat money. Governments started fiat money by making it backed by gold (a money of the free market). The gold backing was slowly weaned off. We can now consider USD to no longer be a currency (a unit backed by money), but to be money (poor money). Every new currency created out of thin air by a government (the Euro is a good recent example) started by pegging it to some other money. This eliminated its volatility.
But, if a new money was created out of nothing, and without any pegging, no one would know how to value it. It would be volatile, and probably close to worthless initially, as it would have to develop a network effect just like Bitcoin is doing. Bitcoin started as virtually worthless (it cost a minuscule amount of electricity to mine it initially), and has developed a network effect reflected in the steady growth of its price.
If you wanted to have an objection to Bitcoin, it would be more reasonable to say that you don’t expect it to keep growing and evolving into fully adopted money, not that the process of it getting there results in price volatility!
Price volatility does not reflect the progress of Bitcoin adoption.
Bitcoin is only 13 years old, and the network of people adopting it is growing daily. The price (and its volatility) is not a good indication of this.
Some argue that as more people adopt Bitcoin, the volatility will drop. But this is not obviously true. It may be that the volatility increases strongly upwards, particularly if the measuring unit, USD, is dying/hyperinflating, and people are rushing to Bitcoin – The volatility of Bitcoin will skyrocket. But, when it is adopted (meaning when nearly everyone would accept it as payment, or work for it), there will be no other money to measure it against; it will be a unit of account (UoA).
Instead of looking at volatility to assess Bitcoin adoption, consider this:
There are two types of Bitcoin adopters.
- Those that understand that price volatility does not matter, and see Bitcoin adoption as inevitable. They regularly accumulate bitcoin, or they bought plenty early on and are satisfied with their holdings – they rarely sell any.
- Those that buy and sell bitcoin as they are not sure about Bitcoin’s future. They use short-term price as an indicator of Bitcoin being adopted as money.
If you use both of these types of people in your assessment of Bitcoin adoption, then you will be misled.
Type 1 Bitcoiners
Focus only on type 1 to assess Bitcoin adoption, and notice that this is the foundation. By definition, people with this view are not shaken easily from it. They are well-informed and educated, and it may be argued that they are fervently ideological, but it is not blind faith that drives them – instead, it is the desire for a fair money, and not to be ruled, cheated, or stolen from by those with the monopoly on violence (the state). Bitcoin is the only thing that offers this and once you see it, you don’t decide to opt for the slave master’s tokens for the work you do, or opt for some altcoin whose monetary policy is heavily influenced by a nerdy computer programmer.
Let’s not forget that Ethereum (a supposed “alternative” to Bitcoin) was pre-mined by 70%, meaning Vitalik and a few other founders awarded themselves 70% of the total “monetary” supply. What’s more, the coin’s foundation has been infiltrated by the marxist organsiation, World Economic Forum. Who knows what influence they had over the leader of this money? No one who ideologically wants a fair/ethical and open monetary system that is not under any powerful control would adopt such a thing; the only available option to them is Bitcoin.
These type 1 Bitcoiners, passionate about fairness to the benefit of all humanity (and yes, benefit to themselves too of course) educate others (as I do), and this results in more and more type 1 Bitcoiners in existence over time. Their growth ultimately leads to Bitcoin’s success, in a self-fulfilling prophecy – they are the people who you can reliably sell your bitcoin too, which increases the salability of the economic unit; this is how money evolves. The more reliably that you can sell your bitcoin, the more confident you can be to accept it as payment.
Type 1 Bitcoiners are not reflected in the day-to-day price action as they are not participating significantly in the market. Their influence, however, is reflected in the general long-term trend of price (the higher lows); and that is obviously increasing. (For more information on how Bitcoin’s price works, see here).
Type 2 Bitcoiners
Type 2 Bitcoiners (and people trading/gambling on the token) emotionally respond to the price and make it volatile. They grow in numbers, but they also run away. Their numbers and conviction over time are unknown, and contribute to the price volatility. They also outnumber type 1 Bitcoiners for now, most likely.
Another way to put it is that price represents the marginal buyer and seller’s opinions, who generally are people trading bitcoin, not truly adopting it. Bitcoin is designed to be money, a savings mechanism, not a token to buy and sell for fiat profits. Although it is possible to trade it, and the vast majority of buying and selling is gambling, this does not contribute to Bitcoin adoption directly. If a person buys bitcoin with the intention of selling it at a higher price, that does not contribute to demand. Over time, that person contributes net-zero to adoption, and in the process makes the price more volatile.
It is very important to appreciate that just about all “altcoiners” are almost no different to Type 2 Bitcoiners – the only difference is their choice of cryptocurrency. If you can see from my explanation why type 2 Bitcoiners are not going to help Bitcoin adoption, then pause a moment and examine if you can see a related major weakness in altcoins. This is only one flaw of many.
How else does a free-market money evolve?
If a new economic unit came into existence, and over time, without the assistance of government or central authority, is destined to overcome all obstacles and dominate the entire world as its preferred money and unit of account – what would that look like at the start? Would its price be volatile?
Absolutely it would be volatile. It certainly can’t be stable, it isn’t money and not everyone values it to be so at the start, and not everyone will accept it as payment.
This hypothetical example describes BITCOIN. The point to debate is not its current volatility, but whether it is destined to be the world’s money in the future. The volatility at the start is not an indication one way or the other if it will succeed, so please, stop mentioning it as a criticism.
To summarise, Bitcoin is volatile, but necessarily so because it is a free-market money that is in the early stages of adoption. It can’t be any other way. Only a money by decree (fiat) can be non-volatile to begin with, and even then it is because it is pegged by the government (with an IOU) to stable money (gold). New money arising from nowhere with no pegging is GOING to be volatile!
Appendix A – What are the Good Properties of Money?
The properties of money can be divided into two major components:
Hard (difficult to produce more of; vs “easy”)
Inexpensive and easy to secure/store
Borderless (can send internationally without hindrance)
Unstoppable by governments
Resistant to confiscation
Resistant to censorship
Neutral (anyone can use it without permission)
Open-source (the technology is not secret and not owned by anyone; no patents)
Antifragile and adaptable
Resistant to unwelcome changes
The number of people using it (Metcalfe’s Law: the value of a communications network is proportional to the square of the number of its users)
Fair (created without a pre-mine – ie the founders did not enrich themselves)
No central control
Sufficiently distributed with a tendency to further distribute (note: even distribution is impossible to begin with)
Static Lightning Address: email@example.com
On-chain or Lightning