This is the third installment in Parker Lewis' essay series Gradually, then Suddenly (originally published Aug 9, 2019). It covers why criticism of bitcoin’s price volatility is short-sighted and ignores the bigger picture unfolding before our eyes.
The list of bitcoin skeptics is long and distinguished. A common refrain among them is that bitcoin is too volatile to be a store of value, medium of exchange, or unit of account.
The principal use case for bitcoin today is not as a payments rail but instead as a store of value.
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This is a critical mental block that many people experience when thinking about bitcoin as a currency, and it is largely a function of time horizon.
The people that store their wealth in bitcoin are forced to think through first principles in order to understand the characteristics of bitcoin, which contradict an establishment view of money.
When central bankers all over the world point to bitcoin as a poor store of value and claim it's not functional as a currency, due to volatility, they’re thinking in days, weeks, and months. All the while the rest of us plan for the long term: years, decades, and generations.
It is helpful to think about the relationship between volatility and value by looking at market adoption. If adoption increases by an order of magnitude, volatility is unavoidable. However, it will naturally and gradually decline as it approaches saturation.
Adoption waves are the natural function of price discovery as the market converges on a new equilibrium, which is never static. It's naturally explained by speculative fear, followed by the accumulation of fundamental knowledge and the addition of incremental infrastructure.
Information asymmetry exists and those that understand bitcoin also understand that, in time, the cavalry is coming. (h/t @btctreasuries by @nvk)
At present, volatility is the natural function of price discovery as bitcoin advances down the path of its monetization event and toward full adoption.
Volatility and store of value are often confused as mutually exclusive. However, they most certainly are not. The U.S. Dollar is a prime example: not volatile (today at least), a poor store of value.
The ECB has also mused that bitcoin is “not a currency”, noting that it is “very volatile” while at the same time reassuring everyone that it can “create” money to buy assets, the very function by which its currency actually loses value.
While failure is a possibility and significant drawdowns are an inevitability, each day that bitcoin does not fail, its survival becomes more and more likely.
On bitcoin’s path to full monetization, store of value must come as a logical first order. As adoption matures, volatility will naturally fall, and bitcoin will increasingly become a medium of direct exchange.
In the interim, it would be far more logical to spend a depreciating asset (dollars, euro, yen, gold) and save in an appreciating asset (bitcoin).
Ultimately, bitcoin’s lack of a price stability mandate coupled with its fixed supply will continue to result in near-term volatility but will drive long-term price stability. It is the literal opposite model pursued by the Fed, BoE, ECB, and BoJ.
This is why bitcoin is antifragile; there are no bailouts. It’s a market devoid of moral hazard, which drives maximum accountability and long-term efficiency.
Bitcoin will continue to steal a share in the global competition for stores of value because of its superior monetary properties. And it has proven to be an incredible store of value despite its volatility.
Swipe up to read the full essay. Illustrations by @anilsaidso.