Bitcoin Is Not Volatile — Adoption Is

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Bitcoin is a 12-year-old novel form of money. Suppose for the sake of the argument, that Bitcoin will one day become the dominant global money: Savings held in Bitcoin, transactions conducted with Bitcoin, prices quoted in Bitcoin. 8 billion people using Bitcoin as their primary currency. A financial system built on top of and fully integrate with Bitcoin. Governments holding Bitcoin. Taxes paid in Bitcoin.

Consider the adoption process Bitcoin would have to go through. From known only by a handful of cypherpunks to as dominant as the internet today. Every person on the planet would need to go from ignorant of Bitcoin to knowing what it is, to having access to it, to trusting it enough to buy some, to moving all their wealth into it, to start setting prices in Bitcoin.

Such a process of discovery is highly non-linear. It cannot follow a predictable path. It will have periods of hype, where many people talk and learn about it, followed by periods where it crashes and is forgotten until it soars again. There is no straight line from 1 $/BTC to 10m $/BTC. To think so is naive.

Appreciation follows this unpredictable adoption path. As more people learn about and start holding Bitcoin, its price increases. The faster this happens, the larger are the returns to holding Bitcoin. So far, it has grown from a market cap of $0 to $1,000,000,000,000 in 12 years. This is the fastest any asset has reached $1T in the history of the world. It beats insane-growth tech giants such as Amazon, Google, and Facebook. Gold is $10T and has a several thousand-year lead.

This path has been bumpy. From a monetization perspective this is expected. The process of discovering and adopting a new form of money is a process of knowledge diffusion which by its nature is unpredictable. From an investment perspective, great rewards rarely come without great risks. It is obvious that the best performing asset in the world will be volatile.

As Bitcoin’s market cap grows, it matures as an asset. When we reach the point where Bitcoin is the global monetary base, new demand can only come from economic growth. At this point, everyone has already moved their wealth into Bitcoin, other currencies are irrelevant, and there is really no Bitcoin speculation. Bitcoin appreciates in real terms — in terms of its ability to purchase real goods and services — because the total value of goods and services grow while the total amount of Bitcoin is fixed. This growth is slow and steady — perhaps a few percent per year, and it does not really fluctuate in value except as a mirror of the real economy’s fluctuations. There is no new demand to move it.

It is simply impossible for Bitcoin to remain volatile in a world where the entire world holds it and uses it as money. Demand cannot fluctuate enough to move the price much.

Bitcoin is thus quite stable when and if it is used as the global currency. The path there is, however, a bumpy ride with both wild returns and wild volatility. But it is not Bitcoin that is wild. It is the way the world learns about it and adopts it. The fundamentals of Bitcoin — its protocol — are reliable, predictable, and transparent. The price, which reflects adoption, is not.