One of the most well-known characteristics of bitcoin is its volatility. Bitcoin’s big price swings often make headlines.
There are many factors playing into bitcoin’s volatility, including speculative investors, adoption rates, bad press, and institutional investors buying or selling large amounts of bitcoin. Typically, when the price of bitcoin makes a big movement up or down, the exact cause is difficult to pinpoint. However, price swings can become extreme because when the price starts to fall, speculative investors usually sell their bitcoins causing a further drop in price, or when the price starts to rise, more speculative investors get on board.
To learn more about bitcoin’s volatility, see “Isn’t Bitcoin too volatile to be useful as a currency?”
Higher adoption rates can reduce volatility
Bitcoin’s volatility has hampered adoption rates because most people cannot keep a large amount of their savings in a currency with such high volatility, especially if they may need to access and use those funds in the short term. This lack of adoption affects volatility because it means that large amounts of bitcoin are owned by fewer people or institutions. For example, if an institutional investor who owns a significant amount of bitcoin sells, it can lead to price fluctuations.
If bitcoin were to become the dominant form of currency for a significant part of the world, more people would use the currency to save, spend, and as a unit of account. This increased adoption would likely cause much lower volatility than it is today, and 50% crashes would be much less likely to occur. When more people adopt and use bitcoin, any event is less likely to cause a large price movement in both directions.
The advantages of a currency without government intervention
One of the
mandates of the Federal Reserve (the central bank of the United States) is to keep US dollar inflation around 2% every year.
In fact, inflation is typically higher than that. Assuming the Fed reaches its inflation target of 2% each year, the value of any savings stored in dollars also decreases by the same 2% each year. While the intentions of governments and central banks may be honest, using inflation to stimulate growth hurts savers in the long run. In contrast, bitcoin has a limited supply of 21 million coins that cannot be increased. Even though the price of bitcoin was volatile in its early years, it’s helpful to be able to save some of your wealth in an asset that has a supply that can’t be increased.
- Bitcoin is more susceptible to price swings than fiat currencies, largely because there is no government intervention in bitcoin’s monetary policy.
- Higher adoption rates will likely help reduce bitcoin’s volatility over time.
- There are advantages to having a currency without government intervention that can outweigh the risks of volatility.
- Bitcoin is not subject to inflation in the same way as dollars because it has a limited supply that cannot be altered.