Bitcoin's Stability: A Safe Investment Haven?

Bitcoin has been described as a highly volatile asset, with frequent moves of 5%, 10%, or even more than 20% in single trading days. Its price history has been influenced by several factors, including supply and demand, investor and user sentiments, government regulations, and media hype. As a result, Bitcoin's value has been unstable, and it has not historically been a stable investment. However, some argue that Bitcoin is a speculative investment, and its value comes from its scarcity.

Bitcoin's historical price volatility

Bitcoin has historically been an extremely volatile asset. Since it started trading properly in early 2012, it has had 13 corrections down of more than 30%. It is not unusual to see moves of 5%, 10%, or even more than 20% up or down in single trading days.

Bitcoin's volatility is measured by how much its price fluctuates relative to the average price in a given time period. The higher the volatility, the riskier the investment, as it is harder to predict what the price will do. Volatility is used to predict how likely it is that the price will change dramatically.

The smaller the market cap of an asset, the more volatile it will be. Bitcoin's market cap is around $350 billion, whereas gold's market cap is around $3 trillion (over 8x larger). Once the price of Bitcoin increases and brings the market cap to a higher level, price movements will become smaller. In short, a higher price equals a higher market cap, which equals lower volatility.

Bitcoin's price is affected by supply and demand. The more demand there is for Bitcoin, the higher people will be willing to pay for it, and the price will go up. If there is no demand, people will be willing to sell for a lower price, and the price will go down.

Bitcoin's high volatility makes it difficult for businesses to accept it as payment, and it is also nerve-wracking for investors. However, high volatility means that experienced traders can make a profit from trading Bitcoin. As Bitcoin matures and becomes more mainstream, its price will rise and its volatility will decrease.

Supply and demand

Bitcoin's price is influenced by supply and demand. When there is more demand for Bitcoin, the price goes up, and when there is less demand, the price goes down.

The supply of Bitcoin is limited, with a finite number of Bitcoins available. The rate of new Bitcoins created each day drops by half every four years. This is known as "halving", and it cuts the number of coins given as a reward for mining in half. The limited supply of Bitcoin adds to its demand.

Demand for Bitcoin has been influenced by several factors, including media coverage, investing experts, and business owners touting its value. Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular for transferring large sums of money for illicit and illegal activities.

The combination of limited supply and high demand has fuelled a rise in Bitcoin's price. However, Bitcoin's price still fluctuates due to various factors, including economic events, regulatory changes, and competition from other cryptocurrencies.

Bitcoin's price volatility is due in part to its small market compared to other global markets. With a limited number of Bitcoins in circulation and strict rules governing the creation of new Bitcoins, demand must follow Bitcoin's deflationary behaviour to keep prices stable theoretically.

While Bitcoin has a history of price volatility, some advise investors to hold for the long term. Bitcoin is a unique asset class, and history has shown that crashes have been followed by new bull runs to all-time high prices.

The emergence of stablecoins

Stablecoins are a type of cryptocurrency that aims to provide a more stable alternative to the high volatility of popular cryptocurrencies like Bitcoin. Stablecoins are designed to be more useful as a medium of exchange by pegging their market value to an external reference, typically a fiat currency like the US dollar, or the price of a commodity such as gold. This stability is achieved by maintaining reserve assets as collateral or through algorithmic formulas that control supply.

The development of stablecoins is driven by the need to create a more reliable and trustworthy form of digital currency. Cryptocurrencies like Bitcoin have struggled to gain widespread acceptance due to their volatile nature, making them unsuitable for everyday transactions. Stablecoins, on the other hand, offer a more stable value proposition, making them more attractive for investors and merchants alike.

The creation of stablecoins can be seen as a response to the shortcomings of traditional fiat currencies and the limitations of existing cryptocurrencies. Fiat currencies, such as the US dollar or the euro, are issued by central banks and are subject to inflation and the policies of those institutions. In contrast, stablecoins are designed to maintain their value relative to a specific asset or basket of assets, providing a more stable store of value.

While stablecoins offer a promising solution to the volatility issues of cryptocurrencies, they are not without their challenges. One key concern is the need for independent auditors to verify the collateral or reserves backing the stablecoins. This introduces a third party into a system that aims to be decentralized, potentially creating new risks and complexities.

Despite these challenges, stablecoins have the potential to revolutionize the financial landscape by providing a more stable, efficient, and accessible medium of exchange. With the increasing regulatory scrutiny and ongoing innovations in the space, stablecoins are likely to play a significant role in the future of digital currencies and the evolution of the finance industry.

Bitcoin's utility as a store of value

Bitcoin's digital scarcity and decentralised nature have made it an attractive store of value. As a digital asset, it is not subject to physical wear and tear or degradation. It is also easily portable, as it is stored and transferred digitally. Bitcoin is also a fungible and divisible asset, with each coin capable of being divided down to 1/100,000,000th of a unit. The supply of Bitcoin is capped at 21 million coins, making it a scarce asset.

However, Bitcoin has also suffered from high volatility. In 2014, it lost 58% of its value, and in 2018, it dropped by 73%. From its peak in November 2021 to its bottom in November 2022, Bitcoin lost over 75% of its value. This volatility has made it an unviable medium of exchange, as its purchasing power is unstable.

Bitcoin's liquidity and utility have improved in recent years, making it more accessible to users. More countries and jurisdictions are accepting Bitcoin as legal tender, and more businesses are accepting it as a form of payment. This increasing adoption and use of Bitcoin demonstrate its potential as an alternative to traditional stores of value like gold and fiat currencies.

Regulatory impacts on Bitcoin's price

Bitcoin has not historically been a stable investment, and its price volatility is influenced by a number of factors, including regulatory impacts.

Regulation is among the key factors that affect Bitcoin's price. The cryptocurrency's rise in popularity has been halted each time a government has introduced restrictive policies, and countries have taken varying approaches to Bitcoin regulation. For example, in November 2019, China accelerated a crackdown on cryptocurrency businesses, causing Bitcoin's value to drop. On the other hand, regulatory "victories" can cause temporary price surges. For instance, in January 2024, after years of Bitcoin Spot ETF denials, approvals from regulators caused Bitcoin's price to climb over the following months to more than $73,000.

The impact of regulatory policies on Bitcoin's price is influenced by the nature of cryptocurrencies as freewheeling and borderless, which presents a challenge to policymakers who are used to dealing with clear-cut definitions for assets. The classification of cryptocurrencies also varies among regulatory agencies and countries. For example, in the US, the IRS treats cryptocurrency as property, while the CFTC considers it a commodity. This lack of consistent regulation across countries and agencies makes it difficult to implement effective policies to control Bitcoin's price.

Regulatory policies can cause market volatility in cryptocurrencies, and this effect can be amplified during times of global crises such as the COVID-19 pandemic. For instance, regulatory announcements by Chinese policymakers targeting the cryptocurrency industry during the pandemic led to significant increases in price volatility, liquidity volatility, and return volatility in the cryptocurrency market.

While government regulation can influence Bitcoin's price, its impact may be limited due to the decentralized and extra-national nature of cryptocurrencies. The differing reactions of China and Japan to Bitcoin highlight this challenge. China's ban on initial coin offerings (ICOs) to prevent capital outflow and money laundering caused a decline in Bitcoin's price, while Japan's recognition of cryptocurrencies as legal tender caused a spike in its value.

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