Why Bitcoin Volatility is Inevitable as the Cryptocurrency Market Ecosystem Matures
Why Bitcoin Volatility is Inevitable
Despite being typical of all commodities to experience volatility, anti-crypto advocates often use Bitcoin’s price fluctuations in arguments against digital currencies. Therefore, the assertion that the masses should not adopt Bitcoin because of its volatility is unfounded. Normally, all types of commodities experience changes in their values on a continuous basis, and Bitcoin is not exempted. This means that the value of Bitcoin will always change depending on a variety of factors. Instead of wasting time trying to correct the inevitable, the market should prioritize solving the real challenges facing virtual currencies.
All Commodities are Volatile
Theoretically, all participants in an economy desire to attain stable prices for the commodities that they consume or produce. In the real sense, this stability is never realized, as the prices are constantly changing. For instance, the price data for the three leading commodities over the past five years indicates that the fluctuation of prices is a norm.
Corn is the most grown crop in the US, with its sales generating a revenue of $40 billion on an annual basis. Corn is an established crop, having been discovered over 10,000 years ago. Nonetheless, this commodity has never stabilized its prices. Over the past five years, the price of a bushel of corn peaked at $520 and had its low at $300 per bushel, representing a decline of 42% in just 24 months.
According to the Harvard Kennedy School, oil is a leading cause of war. The reason behind this is the demand for oil in all sectors of the contemporary global economy. Oil has been used for millenniums. Despite this prolonged availability, the price of oil has remained volatile all through. In the past five years, this commodity had a high of $106 per barrel and a low of $26 for the same volume, representing a drop of 75%.
Before the introduction of money, gold was the preferred store of value. To date, it still remains to be one of the most precious and valuable assets known to man. Often, Bitcoin is referred to as digital gold because it can be transferred between users without the regulation of governments. Although the gold market has been existence for long, price stability has never been attained. Over the past five years, the price peaked at $1,390 for an ounce and had a low of $1,045 per ounce.
Why is Bitcoin Volatile?
Since Bitcoin prices are determined by the prevailing market conditions, they will forever be unstable. The two factors that influenced market-based prices are supply and demand.
If the supply of Bitcoin was limited and the rate of adoption increased, the demand for the digital currency would intensify, causing an increase in value. However, Bitcoins are added every ten minutes through the process of mining. Nevertheless, Bitcoin still runs on a deflationary model because the amount of new coins being circulated in the market is diminishing.
If the demand for Bitcoin were to remain constant for a period of many years, it would eventually overwhelm the supply causing an increase in the price of Bitcoin. However, demand for Bitcoin is always increasing as the rate of adoption increases. In future, the number of people owning or using Bitcoin is expected to increase even further.
Going by previous trend, the supply and demand forces in the Bitcoin markets indicate that the cryptocurrency will continue to grow in value. Normally, prices increase as a result of population growth and economic development. In the case of Bitcoin, increased population means a higher adoption rate, and economic expansion means more people are able to afford the crypto asset.
The price of Bitcoin will forever be unstable; anyone who thinks otherwise is chasing a mirage- an unattainable substance. As this article notes, the prices will continue to increase over time due to the aforementioned reasons.