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Bitcoin’s recent price action has been nothing short of a spectacle, with several all-time highs being reached in recent weeks, while at the same time there have been sharp declines. But volatility is not the same as risk.
Daily fluctuations of 5% or more are commonplace, creating a rollercoaster effect that is exhilarating for experienced Bitcoin users but unsettling for traditional investors who are now entering the market in greater numbers. For those accustomed to the slow, steady pace of conventional assets, Bitcoin’s volatility is a cause for concern. But what do these wild fluctuations actually mean?
When most people hear the term “volatility,” they instinctively equate it with danger. An asset that experiences large price fluctuations must be risky, right? Not quite. While volatility measures the frequency and magnitude of price changes, risk is a completely different concept: the likelihood of a permanent loss in value or erosion of an asset’s purchasing power over time.
This distinction is crucial, especially when it comes to assets like Bitcoin. Its rapid price fluctuations often lead to it being prematurely labeled as “too risky.” But is Bitcoin really risky in the long term, or is its volatility simply misunderstood in the context of its unique monetary characteristics and role as an emerging asset class?
The hidden risks of fiat stability
To really understand the risk, consider the US dollar. On the surface, the dollar appears to be stable. Its value does not fluctuate much compared to everyday consumer goods and it is generally accepted.
But beneath this façade lies a risk that few acknowledge: the constant erosion of purchasing power due to the expansion of monetary policy.
For decades, central banks have continually increased the money supply to finance government debt, rescue packages and economic stimulus programs. This was allowed by a small group of technocrats control the price of money.
A few months ago, free-market advocates were thrown into uproar when Democratic leaders proposed imposing price controls on consumer goods. But there is no comparable answer to the fact that price controls already apply to money itself – the most salable commodity of all.
Printing money makes political sense, but it amounts to a tax on people and companies that hold cash – often lower and middle class people. If the supply of dollars grows unchecked, the purchasing power of the currency declines. The risk is subtle but omnipresent: year after year, you buy less with your money.
Wages may eventually catch up, but surprisingly little attention is paid to the emotional distress and dislocation caused by inflation while wages lag, forcing workers and business owners to adjust prices, employment arrangements, capital investments and other aspects of business operations constantly re-evaluate.
In this environment, savers are being told that it would be foolish not to “invest” their money in risky financial instruments that they probably don’t fully understand, just to keep up with inflation. This is not stability – it is a precarious balancing act designed to create more wealth for the rich and obscure the true risks of an inflating fiat system.
Bitcoin’s Volatility: A Feature, Not a Bug
Bitcoin’s volatility reflects something fundamentally different. It goes through a process of price discovery in which millions of individuals, institutions and nations determine its role in the global financial system. Economists refer to this phenomenon as “monetization,” where an asset goes from serving a niche to being widely accepted.
During this time, the price of Bitcoin is bound to fluctuate dramatically. Early adopters speculate, institutions cautiously test the waters, and market participants react to news, emotions, and trends. While unsettling for some, this volatility represents a natural phase in the life cycle of an asset undergoing rapid adoption. Over time, as adoption matures and liquidity increases, Bitcoin will be further along its price discovery journey. Its volatility is expected to decrease as gold’s purchasing power stabilizes as mainstream acceptance increases.
The illusion of stability in traditional systems
Policymakers and central bankers often portray their interventions as necessary to ensure “stability.” Through mechanisms such as interest rate manipulation, quantitative easing and direct market interventions, they attempt to smooth out volatility in traditional markets. But this stability comes at a price: it obscures systemic vulnerabilities and concentrates risk.
Consider how unelected central bankers make decisions that affect the economic well-being of billions by manipulating interest rates and printing currencies without checking their power. The appearance of stability masks an underlying fragility. When a currency loses value rapidly, as occurs in hyperinflation or currency crises, the consequences can be catastrophic, destroying savings and destabilizing society.
Since 1971, when the United States fully transitioned to a purely fiat-based dollar system, dozens of hyperinflation events have occurred worldwide. According to a comprehensive study by economists Steve H. Hanke and Nicholas Krus, there have been 56 episodes of hyperinflation in recent history.
Bitcoin’s volatility, on the other hand, does not hide its risks. Its value is determined transparently on open markets,…
