Bitcoin: Too Volatile To Be Money?

Bitcoin University

Bitcoin University is an educational channel devoted to Bitcoin, financial freedom, and self-sovereignty. Matthew also covers relevant macro and financial news.

Is Bitcoin too volatile to be money?

This came up in our discussion of Bitcoin’s HODL culture late last week. There was this question:

Let’s compare a weekly chart of Bitcoin versus the U.S. dollar with the yen versus the U.S. dollar…

We can conclude that the Japanese yen is too volatile to be money.

Just look at that. How do people survive in Japan?

This is probably why Japan no longer exists; it only exists in anime.

But Bitcoin’s volatility has gone down over time. It was much higher in the first five years of its history, and we can see that volatility trending down over time.

Now, why is Bitcoin as volatile as it is?

One way of thinking about it is you can think of Bitcoin as a swimming pool with a fairly small amount of capital, just $1.1 trillion at this point, while other global assets are really the ocean.

We have: 

• Gold: $13 trillion

• Equities: $130 trillion

• Bonds: $315.5 trillion

• Real Estate: $375 trillion

These are global approximate numbers.

Bitcoin currently accounts for roughly 0.13% of global investment assets. 

It only takes a few small inflows and outflows from the ocean of these global assets going into Bitcoin for the ocean to completely overwhelm the swimming pool, both going in and going back out.

1% of the global bond market cap moving into Bitcoin would be approximately $3.15 trillion worth of inflows, which is almost three times Bitcoin’s current market cap. That would be if 1% of bonds globally entered Bitcoin.

Some common misconceptions about this: 

• $3 trillion moving into Bitcoin does not just increase its market cap by only $3 trillion. This isn’t true.

• There’s usually some multiplier effect that various people try to attach permanent numbers to, but it depends on how aggressive buyers are compared to sellers.

As we always say on this channel, prices are always set at the margin by the marginal buyer and seller coming to an agreement on where to exchange fiat for Bitcoin. If sellers pull their offers, an asset like Bitcoin can instantly increase its market cap by much more than the inflows.

We see this all the time with gap-ups and gap-downs after aftermarket stock earnings reports, where all the people offering at certain prices pull their offers. Then, the price gaps go up in this case.

Something like this can happen to Bitcoin…

$3 trillion worth of market cap bleeding out of bonds into Bitcoin would make Bitcoin go up two, three, four, five times rather than just the $3 trillion. Either way, Bitcoin’s market cap is still quite small relative to the ocean of global assets, which greatly contributes to the volatility.

Also, the fact that Bitcoin is a purely free market is not manipulated; it’s not controlled by a central bank. The price is set globally, and no one can control the price of Bitcoin.

Now, the world is slowly moving away from analog assets and poor stores of value like bonds and real estate and toward Bitcoin, the world’s preeminent digital asset.

It’s not a smooth linear path; it never is, and it never was for the big tech stocks, for example, in their early years.

Amazon is another example of an asset that started extremely volatile and became less volatile over time as its market cap grew. So, it’s never a smooth linear path; there’s always volatility and chop as the market constantly alternates between fear and greed.

But we can be sure of two things about Bitcoin: 

1. Fiat money like U.S. dollars, euros, and pounds will continue to die.

2. Bitcoin will continue to take market share.

Fiat’s death rattle may lead to even greater volatility over the medium term.

If you’ve read the book When Money Dies, this happened in Weimar, Germany, after World War I. It’s a great book. There’s a 1975 and revised edition, which is quite good and came out in 2010.

Here, we can see the price of physical gold in Papiermark in Weimar, Germany, from the start of World War I in 1914 to the terrible years of 1923 and 1924, when the Papiermark was essentially demonetized.

This changed the price of gold in Papiermark from one mark per whatever the measurement of gold is, to one ounce of gold.

Then it went to a trillion here over just about 10 years. But we can see here that the black line is the appreciation of gold priced in Papiermark.

But the path was extremely volatile, and that’s what this lighter color shows; this is the percentage change in gold’s price in Papiermark monthly, and we can see there were gigantic melt-ups and gigantic drawdowns.

This is why it’s very important.

Bitcoin will follow a similar path. As the fiat currency, the local fiat currency, or whatever you’re pricing Bitcoin in dies, you can end up with a lot more volatility than you might expect, even though the end goal is guaranteed.

The end goal for gold priced in Papiermark would always be infinity. It went to a trillion, then 10 trillion, and now Papiermarks are completely worthless, obviously.

The path was uncertain and volatile, not the end goal for gold priced in Papiermark.

The same is true for Bitcoin priced in fiat: the end goal is certain, which is a world on a Bitcoin standard. But the path to that end goal is volatile and unpredictable. This is why we always use the dollar-cost average in Bitcoin. We don’t try to time the market.

As Jack Bogle used to say about the stock market, “Time in the market beats timing the market.”

So, this is why Bitcoiners HODL and why we’ve developed this huddle culture we’ve been talking about. This is why we don’t trade in and out of Bitcoin and don’t use leverage. We’re expecting a path like this to a $10 million Bitcoin. We will get there and go beyond that, but it will be a very volatile path.

People always get the framing wrong here. It’s not about protecting your money by picking when to enter and when to exit Bitcoin. It’s more about protecting your money by exiting fiat completely.

As Michael Saylor says, “Bitcoin is the exit you never come back from,” because you’d be exchanging very strong money for very weak money if you came back. This is a very important warning to remember: keep only as much money in U.S. dollars and other fiat money as you are willing to lose.

This seems absurd, just as it would have been an absurd thing to say in 1914 in Germany, right as World War I was breaking out. But, this is what will also happen to the U.S. dollar. 

So, keep only as much money in U.S. dollars as you’re willing to lose.

Eventually, the whole world will wake up to this reality, and that’s when Bitcoin’s price will go to infinity in fiat terms. A countervailing force to price volatility, as we experience it, this price volatility that’s being caused and will be caused by fiat’s death rattle, as we saw in Weimar Germany, a countervailing force to this volatility is the move to a Bitcoin circular economy, which is something eventually everyone will do. 

A lot of us are in the process of moving to live on a Bitcoin circular economy or Bitcoin standard. For many of us, Bitcoin’s price volatility is becoming more and more relevant as we move our financial lives onto a Bitcoin standard.

Eventually, everyone will be there.

In the future, you won’t buy Bitcoin; you’ll earn it. In the future, you won’t sell your Bitcoin for fiat; you’ll spend it on goods and services. As more and more Bitcoin comes in and flows out of your personal and business coffers, its fiat exchange rate will matter less over time because you’ll just be pricing everything in Bitcoin. 

It was those few people in Weimar Germany who were earning gold and spending gold if these people, in fact, existed. They did not have to worry as much about the fiat exchange rate of the Papiermark.

In conclusion, the funny thing is that even when measured in fiat, most of Bitcoin’s volatility has always been on the upside.

So you have a choice: You can learn to live with Bitcoin’s fiat price volatility as you gain purchasing power over time, or you can have a nice, comfortable, non-volatile life as your net worth and purchasing power trend to zero.

This is the path of holding U.S. dollars, other inferior currencies, and fiat money compared to Bitcoin. You’ll have a nice, non-volatile life, but you will get poorer over time as inflation eats into your purchasing power.

Bitcoin University is an educational channel devoted to Bitcoin, financial freedom, and self-sovereignty. Matthew also covers relevant macro and financial news. 

Learn more at: https://www.bitcoinuniversity.com/  
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