Bitcoin Value Exhibits Volatility, Like Other Currencies

August 24, 2014 05:00 UTC

The Bitcoin price, or to be more precise, the value of Bitcoin in relation to a particular fiat currency, has recently been falling. This may not necessarily be a bad thing. For too long, the ability of Bitcoin to function as a currency, has been somewhat restricted by tales of its success as an investment. The currency has, until recently, been a victim of its own success. Investors had been coming on board with the sole intention of acquiring bitcoins and hoarding them with the intention of selling them in the future at a significant profit. They were encouraged to do this by the almost exponential growth that Bitcoin value showed throughout the year 2013. Now, having watched the slow decline in Bitcoin value since last December, many investors are choosing to reduce their exposure and this is, of course, acting to further dampen Bitcoin value in the market. Conversely, people are now much more likely to choose to spend their bitcoins as the benefits of hoarding them, with the current decline in “Bitcoin Value,” are rendered significantly less attractive.

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Looking at the field of Economics, it is reasonable to say that a lot of well-educated people have spent large portions of their time looking at how people perceivably behave in the presence of money. That’s what the whole subject is about… looking at how people, that have unlimited wants and limited means, act to fulfill their wants and needs. Now, in life, there are only two things a person can do with money, they can choose to save it, or they can choose to spend it. We can also reasonably say that, unless they happen to be Wilkins Micawber, the amount they spent added to the amount they saved, will always equal 100% of the money they had.

Saving Isn’t Hoarding

Now, in economics we say that the marginal propensity to save generally remains constant for an individual. This means that if I earn $100 and spend $80 per week, then my propensity to save is 0.2, and by definition my propensity to spend is 0.8. If we aggregate society then we get an aggregate propensity to save that may be higher, or lower, that my example, but it will, nonetheless, be generally constant. If people in a society have a marginal propensity to save of, let’s say, 0.3, then we can say that, should their aggregate income rise by 20% then they will, over the medium term, act to save 0.3 of that increase and act to spend 0.7. If we accept that these rates do not generally change, then we must ask, what causes, or has the potential to cause, society, as a unit, to decide to save more, or indeed, to decide to spend more? The short answer is that, people choose to save a greater proportion of their income in the presence of economic uncertainty; in particular, they save more when they think things are potentially getting worse. In times of market uncertainty, people seek to save money, and this had led to increased numbers of bitcoins ending up in online exchanges and cold storage. People are now “selling” those bitcoins, and this is suppressing the perceived Bitcoin value on exchanges. It is my belief that this can be an entirely positive development, and I will now seek to explain why.

All Currencies Are Volatile If They Are In Use

One of the most regular criticisms Bitcoin constantly faces is the one of “volatility.” Every currency is volatile, and this can lead to merchants charging us higher prices, as they seek to hedge their risk. This is additionally true of any payment method, merchants need to charge higher prices to account for credit card fraud, even though the currency in use is fiat: It is really the value that is being transfered. If Bitcoin value was not subject to volatility then that would mean no use is happening. In order to reduce volatility we need to increase the level of Bitcoin adoption and this will lead, in turn, to a subsequent increase in the volume of transactions. As more and more retailers accept bitcoins, it is reasonable to assume that more and more people will choose to use the currency, demand that will counteract the downward pressure caused by merchants accepting bitcoins. A fall in the level of saving means an increase in the level of spending, this is true in all markets. Bitcoin will continue, in the longer term, to grow in value simply because of the more efficient transaction process and the absence of credit card charge-backs. This growth will be at a slower rate than was seen in the latter months of 2013. What we are now seeing is the end of a long awaited adjustment in Bitcoin value. It is not only a steadying of the ship but also an inevitable developmental stage in the evolution of a technology. Remember the adoption of computers also occurred in stages. As Bitcoin finds its level, we will also find that widespread adoption leads inexorably to stability. We are seeing the beginnings of that widespread adoption with companies such as Dell, Tiger Direct and Overstock, as well as many others. As more companies accept bitcoins, more and more cash in bitcoins received o a daily basis, and this also acts to suppress Bitcoin value. Bitcoin as a transaction facilitator, has simply been held back by the hoarders for far too long. Welcome back to reality for what is, after all, primarily a currency.

Last modified: August 24, 2014 00:28 UTC

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@P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.

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