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Is Bitcoin’s volatility about to lose its edge?

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This article was originally published by Nik Oraevsky on

Discover why bitcoin’s historic volatility provided a fig leaf for fiat’s failings…and why it won’t for much longer.

Deny, deflect, discredit.

That’s the strategy governments and central banks have been following since the birth of Bitcoin. They downplay the failures of long-term debt addiction, quantitative easing and decades of failed monetary policies; deflect the public’s attention; and do their utmost to discredit the one currency that threatens to usurp fiat’s crown.

But this three-pronged plan isn’t just unsuccessful, it’s self-defeating. In their attempts to disparage Bitcoin, the guardians of legacy finance are drawing the attention of an increasingly financially-literate public to fiat’s failings. What’s more, the one weapon they have — bitcoin’s historic volatility — may well be about to lose its edge.

A brief history of volatility

Bitcoin’s critics push the narrative that it is inherently volatile, the price dictated by waves of speculators investing and divesting in search of quick buck. There’s more than a grain of truth in this assertion, but it only tells a fraction of the story.

Yes, bitcoin’s price has traditionally been driven by speculation, but there’s a more compelling reason for its volatility. In Bitcoin’s early years, it remained in many ways a highly centralised currency; only Satoshi and a few others were mining it, early adopters were few in number, and the options to buy bitcoin were extremely limited.

Like any other asset with an organic price discovery mechanism, Bitcoin’s volatility has always been a function of supply and demand. As a result of mining rewards being cut in half every four years, causing the new supply of bitcoin to decrease, and as demand for bitcoin gets priced in, there is an upward pressure on price. Then, as perceived demand (read: derivative bitcoin instruments) gets too far ahead of real adoption and spot demand an inevitable correction occurs. When looking at bitcoin’s price history since its inception, its four-year cycles have been reflective of this — although of course, past performance does not always indicate future results.

Flattening the fiat curve

What changed? In a word: adoption. As Bitcoin evolved from a monetary curiosity into a long term store of value, it suddenly became attractive to a huge range of powerful financial and political actors.  

It started with a few far-sighted corporations and institutional investors like MicroStrategy. Even though this has happened in the last couple of years, it seems a lifetime ago that these pioneer organizations were roundly mocked for believing in Bitcoin. Today, the list of Bitcoin investors includes a large and growing number of both public and private businesses, politicians, and countries, together with derivatives such as exchange-traded funds.

Where once a few whales controlled the market, with their activity moving the market sharply up or down, the distribution of ownership can have a significant dampening effect on volatility. Since corporate treasuries typically hold bitcoin as a hedge and/or diversification strategy, this requires them to keep their portfolios balanced and therefore to offload bitcoin as their dollar value climbs, or purchase more when it falls. This significantly augments liquidity in the market, ensuring there is enough bitcoin for buyers (and buyers for bitcoin), helping to restore equilibrium to the price.

That’s bad news for one class of people: those whose jobs depend on the public keeping faith with fiat. But, it gets worse. By painting volatility as an enemy to avoid at all costs, the guardians of legacy finance have created a hostage to fortune that will make trust in fiat collapse all the faster when the tide goes out.

Chickens, meet roost

Those who live in glass houses shouldn’t throw stones. Yet by focusing on volatility, Bitcoin’s critics are throwing a boulder straight at the heart of fiat’s fragility.

The champions of legacy money would much rather you ignore the fact that their policies are failing. On its website, the ECB states that the primary objective of its monetary policy is to maintain price stability; this goal is becoming ever more distant with every passing month. Euro inflation is now at its highest since the currency was introduced. Inflation has recently hit 6% in Germany, 8% in Estonia, and over 9% in Lithuania. When you stake everything on stability and damn competitor currencies for their own volatility, you only quicken the pace at which people lose faith in fiat and the long-term debt cycles that drive its decline.

This is brilliantly covered in a remarkable, chilling long-form essay by Dylan LeClair, where he shows how decades of easy monetary policy and the massive expansion of credit has driven asset price inflation. While this has concentrated wealth into the hands of the few, many of the effects go unnoticed precisely because assets are priced in fiat. You can see this most clearly in the exchange rate for other commodities: while real estate spirals ever-upwards in dollars, long-term it’s actually going down against bitcoin.

It’s becoming ever harder to cloak the dollar’s (and other currencies’) decline. As ordinary people notice that their cash buys less with every monthly shop, it’s clear that those mocking bitcoin’s volatility are projecting so hard, you could use them for PowerPoint presentations. While years of inflationary monetary policy and debt addiction fly home to roost, one bitcoin is, will be, and always has been worth one bitcoin — and worth more in dollar terms with every passing year.

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