Can Bitcoin’s Volatility Be Tamed?

Abstract

Bitcoin is a software for operating a peer-to-peer payment network with its own hard money, without having to rely on a trusted third party. As the use of this network has grown, the value of the token underpinning it has increased sharply, with its total outstanding supply currently exceeding $100 billion in value. As Bitcoin begins to attract attention as an investment asset, major questions remain about its volatility, whether that volatility can be reduced, and whether or not it could stand in the way of Bitcoin gaining a monetary role in society. This article explains Bitcoin’s volatility as a consequence of its completely inflexible and constantly decreasing supply growth, and describes why that is a design feature necessary for Bitcoin to operate successfully. No potential alterations to Bitcoin’s design can thus be expected to alleviate its volatility. The article draws an analogy between Bitcoin and gold to examine whether continued growth of the Bitcoin network would help it gain more stability, or whether the lack of stability will prevent the network from growing beyond its status as a fringe network.

TOPICS: Real assets/alternative investments/private equity, legal/regulatory/public policy