Ask CryptoVantage: Isn’t Bitcoin Too Volatile to Be Useful as a Currency?

Bitcoin’s Volatility

Picture being the owner of a small cafe, dependent on week-to-week sales in order to have enough cash in the bank to afford overhead costs. Accepting payments in bitcoin could be disastrous for your business if the value of that bitcoin were to decrease 30% in a week. At the end of the week you may not have enough money left to pay the bills or your employees. This type of situation is why many people are unwilling to accept or use bitcoin for day-to-day transactions. If you do not have a nest egg to fall back on while you wait for bitcoin’s value to increase again, you could be left in a difficult situation.

Most people who are willing to use bitcoin as a currency with its current levels of volatility are either already well off, or are negatively affected by their government’s level of censorship on transactions or manipulation of their nation’s currency (inflation).

The reason that fiat currencies are not volatile is because of the level of government intervention and currency manipulation, which prevents free market trade and makes the markets less efficient/accurate than they would be otherwise. By having stable, non-volatile currencies, we are sacrificing the benefits of a free market. In general, this government intervention tends to benefit people who are already wealthy at the expense of regular people. There are hidden costs to having a non-volatile currency that many people do not consider. Conversely, bitcoin is a free market currency that cannot be manipulated by governments.

Current Use Cases for Bitcoin as a Currency

Despite the highly fluctuating price of bitcoin, there are certain scenarios where bitcoin is still the best option for transacting. The two most common scenarios are international payments and high inflation rates.

International Payments

Traditional currencies are typically not a great method for making international payments. In order for transactions to be settled across borders, intermediaries such as Western Union are required. These intermediaries often charge high fees for their services. It can also take days or weeks for international payments to settle. In comparison, international bitcoin payments usually settle within an hour and at a fraction of the cost of traditional means.

Additionally, some governments limit or control which international payments their citizens are allowed to partake in, which can exclude them from the global digital economy. Bitcoin allows anyone to send or receive payments without censorship from government authorities.

High Inflation Rates

People who have a long-term mindset like to save some of their earnings for retirement, or to pass on to future generations of their family. All fiat currencies are designed to decline in value each year through inflation, making them a poor method of saving these earnings long-term. For example, in the US they aim to increase prices by 2% each year to incentivize spending, making any money stored in US dollars worth less and less each year. The situation in many other countries is much worse.

Some nations have currencies that have much higher rates of inflation (in the double digits or even higher), which makes it difficult for citizens to store any of their earnings even for the short-term. Because the supply of bitcoin can never be inflated, some people in these countries are using bitcoin to store their wealth. The volatility of bitcoin is not as bad as the downward volatility of their nation’s currency.

Bitcoin’s Volatility is Declining

Over the last five years, bitcoin went from a $3B market cap to a current market cap of $750B. Most of this growth has occurred in the last 6 months. This level of growth is not attainable without high levels of volatility. If bitcoin is going to be used as a global reserve currency, or a currency used by billions of people every day, the market cap is going to be in the tens to hundreds of trillions of dollars. On the way up to this market cap, volatility is bound to happen.

The good news is that as more and more people start using bitcoin, the collective buying, selling, and holding by people and institutions will dampen out the volatility. With increased bitcoin adoption, we can expect to see a major decrease in its volatility.

Currency vs Store of Value

Even though bitcoin’s volatility limits some of its functionality as a currency, bitcoin serves more purpose than just a medium for everyday payments. Currently, the most popular use case for bitcoin is as a long-term store of value.

Bitcoin’s limited supply and resulting scarcity leads many people to believe it is a good long-term store of value and that its price will continue increasing through time. The volatility of bitcoin does not make it a bad long-term store of value, because despite the day-to-day price fluctuations, the overall price of bitcoin has historically trended upwards. Many expect this upward trend to continue.