The Curious Case of “Bitcoin is Too Volatile”

Bitcoin has a reputation for being a volatile asset – yet is it really the case? Let’s talk about Bitcoin, volatility and what you should be looking at when deciding whether to buy your first BTC.

We bet that every time Bitcoin’s price shoots up, you almost jump out of your bed and calculate in your head what an investment in Bitcoin five years ago would have turned out to be. You then grab your phone to tally your mind’s calculations with that of the calculator. 

A few thousand dollars worth of Bitcoin back in 2015 would have made you a millionaire today, you tell yourself. Sadly though, you’ve never invested in Bitcoin because of dinner-time conversations that led you to believe Bitcoin is nothing but a speculative asset, one that is too volatile.

You even followed Bitcoin’s price action on some days, but the sudden dips in its price clouded your view of its long-term potential. So, you put your money in stocks, gold, and other commodities. 

The good thing is, you’re not alone. Many of us investing in Bitcoin today stood at the crossroads of where you stand today. We knew Bitcoin had great potential, but we didn’t believe it. Like you, most of us thought it was too volatile to be a store of value.

In this article, we will walk you through comparisons to demystify this common, yet not particularly accurate perception.

Busting the myth

Nobody really dislikes Bitcoin’s volatility when its price surges more than 10% in a day. But the moment it plunges by 10% or more, people lose their minds over it. You’ve done that too, right?

The strange thing is, many traditional assets exhibit higher volatility than Bitcoin, but they often go unquestioned. According to a VanEck report in November, the stocks of 112 of the S&P500 companies were more volatile than Bitcoin over a 90-day period. The same number for a one-year period was 145.

Want more proof?

Bitcoin price volatility has been lower than that of Tesla stocks (TSLA) on many instances in 2020. In September, Bitcoin’s price fluctuated by less than 1.25% on more than 50% of the days compared to only 6% days for Tesla.

Also, if we consider 10% daily price deviation as our benchmark to define a highly volatile asset, there were only five days in the first nine months of 2020 when Bitcoin’s price deviated by 10% or more. Interestingly, the average price deviation of Bitcoin during the same period was only 2.3%. 

Volatile? The stats tell you otherwise, don’t they?

Volatility as a measure of safety

Even though Bitcoin’s price volatility has significantly reduced, is it now stable enough to be a safe store of value?

To answer that question, ask yourself, would you store all your savings for retirement in cash simply because it is non-volatile? You wouldn’t think of it. Why? Because if you put a million dollars in cash in your private safe today and pull it out after 30 years, it’ll be the same million dollars but with less purchasing power. 

This is because our current economy is based on an inflationary model. Central banks mint banknotes and coins at free will, reducing the overall value of the total notes and coins already in circulation. This forces people to pay more money for the same things year after year.

As is evident, fiat currencies may be non-volatile in the short to mid-term, but they lose their purchasing power over the years. For example, the U.S. dollar has lost 86% of its purchasing power in the last 50 years.

Hence, low volatility may not necessarily define a credible store of value. Similarly, high volatility does not make an asset an inadequate store of value.

No wonder all investment advisors recommend investing your money in any other asset but fiat currencies. In most cases, people pursue common options such as gold and stocks completely ignoring the potential of Bitcoin.

And they are not to blame. It is the mainstream media that does not necessarily understand the virtues of Bitcoin and often highlights its negatives. The lack of information keeps most people away from investing in Bitcoin.

Bitcoin as a Store of Value  

Bitcoin, unlike fiat currencies, is deflationary, meaning its purchasing power increases over time. Bitcoin’s supply is limited to 21 million coins, and the number of coins generated over a fixed interval is halved every four years. Besides, as its new supply decreases with time, there is an increasing demand for Bitcoin, pushing its price further up.

Bitcoin has certainly exhibited high volatility, however, if you zoom out a little from the monthly price action, Bitcoin’s history of year-over-year value provides another side of the story. 

Moreover, its price is consistently gaining more stability as more investors place their money and trust into holding Bitcoin in their wallets. As the market size increases, the reliance of Bitcoin’s price on large-scale investors is reducing, and the impact of anyone selling their Bitcoins is absorbed by the rest of the market.

Throughout the history of Bitcoin, it has set itself apart from other safe havens such as stocks or gold as it is a peer-to-peer and decentralized asset. This means, there is no central entity, tech-world boss, or government controlling the use of Bitcoin. 

It was created for only one reason: to help you achieve a level of financial freedom where you do not have to rely on banks or other financial institutions. It was created so people like you and me can have self-custody and full control over our money

Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video What is Money, Really?