If my prediction is wrong and Bitcoin ever stops being volatile, that might be a good time to dump it. If Bitcoin were less volatile, would it have an even more rapid adoption rate? Once Bitcoin starts killing the other currencies, it will still be volatile, and this will still be an indication of its success. And this will be the ultimate sign of Bitcoin’s success. They are not able to think far enough ahead to understand Bitcoin’s ultimate destiny. In fact, a higher price makes Bitcoin more useful because a higher price indicates that more people want to buy, which means that Bitcoin’s liquidity grows, which makes it more useful as a currency. Those who worry about Bitcoin’s volatility fail to understand what it actually means for Bitcoin. Liquidity means that a valuable amount of the good can be bought or sold without significantly altering the price, whereas volatility refers to the degree and rapidity of price changes, independent of the volume of trade. So how, exactly, can volatility be a problem? A thing can serve as a store of value without being a medium of exchange or a unit of account, and a thing can be a unit of account without being either of the other two.
Money is often simultaneously a store of value, medium of exchange, and unit of account. It is still excellent as a store of value and a medium of exchange, which are good enough reasons to buy into it. However, the only necessary relation between these three functions is that a medium of exchange must also be a store of value. One simply trades in smaller amounts of it. ” It’s like saying, “This novel is so exciting that no one will ever read it! ” they lament. “Nobody will ever use something so volatile! ” It’s like saying, “This oven is heating up so fast that I’ll never be able to cook with it! To complain that no one will use Bitcoin because it is too volatile is therefore like saying, “Bitcoin’s adoption rate is so astonishingly fast that it will never be popular! This is nonsense because Bitcoin’s price has to go up as more people start using it, and if a lot of new people start using it, then it has to go up fast (that is, be volatile).
Bitcoin’s rapid adoption rate almost completely explains its volatility today; I see no need, at any rate, that any additional explanation is required. Volatility can be distinguished from liquidity, which is something that Bitcoin really does need. There is no evidence that Bitcoin’s volatility is hurting it. There is no particular reason that Bitcoin’s volatility, which makes it less useful as a unit of account, should impede its growth as a currency. How can it be a currency when you can’t use it to distinguish a profit from a loss? The liquidity of a currency limits the size and volume of purchases that can be made with it. In the short term, what’s one decimal point right or left? Konrad Graf has written an article developing this point. “But,” the whiners protest, “Bitcoin can’t be used as a unit of account! “Bitcoin is too volatile! It should become less volatile as it becomes more widely adopted because it will be harder for local events and individual people to affect the price very much, right? Something that regularly grows in both popularity and usefulness will necessarily be volatile. Bitcoin may stabilize in terms of real goods, but I see no reason to think that it will stabilize in terms of other currencies.
In the relatively near future, there may come a time when no real unit of account is available because Bitcoin will be growing at a rapid pace even as the other currencies are hyperinflating. Any imaginable indication of Bitcoin’s adoption rate will show that its adoption rate is extraordinarily rapid. Not necessarily. Although perhaps we will see less wild daily swings, I think Bitcoin is unlikely to ever attain anything like a stable price. Bitcoin will never be widely adopted while it’s like this! People will just have to think a little bit more carefully about their economic decisions during this period. Now sit back, quit complaining, have a nice glass of wine, and watch as Bitcoin takes over the world. There would have to be some sweet spot at which there is exactly the right balance of bitcoins and dollars. Therefore, I would suggest that we should never expect an equilibrium between bitcoins and dollars or any other currencies.
