Bitcoin and Volatility

The following is, I suspect, an important point, and one that I haven’t heard anyone make so far.

Bitcoin is currently (and this changes regularly, so will be out of date shortly after this is written) hovering around the $10,000 mark, with a total market cap of around $170 billion.

The volatility of Bitcoin – both daily and intra-day – has not decreased as the price has increased. There are still 10%+ intraday moves, and 3 – 5% daily moves aren’t uncommon at all.

Let’s assume that the BTC bulls are correct, and the price goes to a million dollars in a couple of years (or “to the moon”, in BTC parlance). That implies a total market cap in the region of $10 trillion, which would be a size-able piece of the entire world economy (by comparison, global GDP is somewhere north of $100 trillion).

Let’s also assume, barring changes that nobody is even talking about yet, that BTC remains highly volatile, even at that stratospheric price. I’ve heard people claim over the years that eventually things will settle down, but I’ve seen no evidence of this so far.

What does that do economically? What’s the ramification of a large percentage of the economy having dramatic volatility of this nature?

The major global currencies seldom move more than a percentage point or two on any given day. The rapid appreciation of the Swiss Franc in 2015 caused serious problems in a number of countries, and required various countries to backstop their mortgage industries (some people had hedged by taking out mortgages in Francs, instead of their local currency or Euros). That was a one-time event though, and primarily limited to Europe. What would happen if this sort of move (in both directions, with little advance warning) occurred several times per month, on a much larger basis, and on a global scale?

None of this is insurmountable (although precisely how one might go about tamping down the vol of a distributed blockchain is beyond me), but people need to start thinking about this before it causes economic havoc. Because it absolutely will.

 

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