Bitcoin’s recent price action has been nothing short of a spectacle, setting several all-time highs in recent weeks while experiencing sharp declines. But volatility is not the same as risk.
Daily swings of 5% or more have become commonplace, creating a rollercoaster effect that feels exhilarating to seasoned bitcoiners but unnerving to the traditional investors who are now entering the market in greater numbers. For those accustomed to the slow, steady pace of conventional assets, bitcoin’s volatility is a source of anxiety. But what do these wild fluctuations actually signify?
When most people hear the term “volatility,” they instinctively equate it with danger. An asset that registers large fluctuations in value has to be risky, right?Not exactly.
While volatility measures the frequency and magnitude of changes in value, threat is an entirely different concept: the probability of a permanent loss or erosion of an asset’s purchasing power over time.
This difference is crucial, especially when contemplating assets like Bitcoin. Its immediate fluctuations in value lead to knee-jerk tests of “too risky. “But is volatility misunderstood in the context of its exclusive financial homes and its role as an emerging asset class?
To really perceive the risk, let’s take the US dollar. At first glance, the dollar appears stable. Its price does not vary much compared to common consumer products and is universally accepted.
Underneath this veneer, however, lies a threat that few people recognize: the steady erosion of purchasing power due to the expansion of the cash supply.
Over decades, the Federal Reserve has steadily debased the currency it is charged to protect in order to finance government debt, bailouts, and economic stimulus programs. This has been allowed to occur because a small cabal of technocrats control the price of money.
A few months ago, free-market advocates were agitated when Democratic leaders recommended imposing value controls on customers. But there is no comparable answer to the fact that value controls are already being imposed on money itself: the saleable (i. e. , negotiable) maximum. ) of everyone.
Printing money is politically convenient, but it also represents a tax on individuals and businesses that have cash. In many cases, these are members of the middle and lower classes, who are less likely to have a significant portion of their net worth invested in assets.
As the dollar quantity increases uncontrollably, the purchasing power of cash decreases. The risk is complex but ever-present: year after year, your dollars buy less.
Wages may eventually catch up, but curiously little dismay is true of the emotional strain as wages lag inflation, forcing workers and business owners to continually reassess prices, employment situations, capital investments and other aspects of business operations.
In this environment, savers are told that if they want to keep pace with inflation, they would be silly not to “invest” their money in risk-laden financial instruments that they probably do not fully understand.
Bitcoin’s volatility reflects something fundamentally different from the wealth erosion of fiat. Bitcoin is going through a process of price discovery, where millions of individuals, institutions, and nations are determining its role in the global financial system. Economists refer to this phenomenon as the “monetization process” where an asset transitions from serving a niche to becoming widely accepted.
During this period, Bitcoin’s value fluctuates significantly. Early adopters speculate about this, institutions control the waters cautiously, and ordinary people react to news, emotions, and trends. This volatility, while unsettling to some, is a natural step in the lifecycle of any asset being adopted. Over time, as adoption matures and liquidity deepens, Bitcoin will progress on its value-discovery journey. One would expect its volatility to decrease, just as gold’s purchasing power stabilizes. as it is universally accepted.
Authorities and central bankers consider their interventions mandatory to ensure “stability. ” Through mechanisms such as interest rate manipulation, quantitative easing and direct interventions in the markets, they try to mitigate the volatility of classic markets.
But this veneer of stability comes at a cost – it masks systemic vulnerabilities and concentrates risk.
Think about how unelected central bankers make decisions that affect the economic well-being of billions of people, manipulating interest rates and printing cash with little control over their power. The appearance of stability masks an underlying fragility. If a currency devalues rapidly, as seen in hyperinflation or currency crises, the consequences can be catastrophic, wiping out savings and destabilizing society.
Since 1971, when the United States abandoned the vestiges of the gold standard and fully transitioned to a dollar system based purely on fiat, there have been dozens of hyperinflation events worldwide. According to a comprehensive study by economists Steve H. Hanke and Nicholas Krus, there have been 56 episodes of hyperinflation in recent history.
On the other hand, Bitcoin’s volatility does not hide its dangers. We decide its price transparently in open markets, without behind-the-scenes agreements or interventionist policies. This transparency may seem chaotic in the short term, but physically it is highly unlikely that Bitcoin would hyperinflate without the consent of its users. This ensures that dangers are honestly assessed rather than hidden under layers of monetary engineering.
For long-term investors, volatility is an opportunity. Price fluctuations create entry points for those with a clear understanding of an asset’s fundamentals. Bitcoin’s volatility, far from being a weakness, signals a dynamic, evolving market.
In a world where fiat systems are under pressure, Bitcoin presents another type of risk: visible, understandable, consistent, and trustworthy. Compare this to fiat currencies, the dangers of which are masked through political decisions and centralized control. Over the decades, constant supply, transparent governance, and growing adoption make it a less risky commodity than fiat currencies, even if its value remains more volatile in the short term.
Understanding the difference between volatility and threat is key to understanding what is happening with Bitcoin today. Instead of searching for Bitcoin’s value in an attempt to discover its value, start by understanding that it follows a fundamentally different style of how to do it. Cash works, based on transparency, scarcity and beyond the control of Americans and political interest groups.
As bitcoin matures, its volatility is likely to settle, leaving behind an asset whose long-term stability is built on solid fundamentals, not centralized control. Bitcoin’s volatility doesn’t mean it’s risky. For those willing to look past the short-term noise, volatility is not something to fear – it’s a sign of transformative potential.
A community. Many voices. Create a free account to share your thoughts.
Our community is about connecting people through open and thoughtful conversations. We want our readers to share their views and exchange ideas and facts in a safe space.
To do so, please comply with the posting regulations in our site’s terms of use. Below we summarize some of those key regulations. In short, civilians.
Your post will be rejected if we notice that it seems to contain:
User accounts will be blocked if we notice or believe that users are engaged in:
So how can you be a user?
Thanks for reading our community guidelines. Please read the full list of posting rules found in our site’s Terms of Service.