After teasing us for most late 2016, bitcoin *almost* reached a new all-time high in the first week of 2017. That is, before startling everyone with a sharp crash, rally and correction.
The headlines were gripping, and transmitted that edge-of-your-seat feeling that something big was going on.
But was there?
I don’t want to imply that price movements aren’t important. A steady increase sends a message, as does a sharp plunge. But the messages sent mask the real news – bitcoin is becoming a valid alternative to fiat currencies, not because of its price, but because of its relative lack of volatility.
Yes, I do mean “lack of”.
A 20% slump in one day is severe, certainly, and has no doubt caused short-term traders considerable stress. But, in the big picture, it’s not material.
We need to remember that, after the initial slump, bitcoin’s price ended up roughly where it was at the beginning of the week. No one can deny that bitcoin has performed well.
Whether the performance is due to fundamentals such as geopolitical uncertainty or monetary turbulence (neither of which are going away any time soon), or to market dynamics (which fluctuate, as always), the outlook of bitcoin is still the same as it was a week ago.
Sure, China accounts for most of bitcoin’s trading volume, and so has a strong influence on price movements, but the fundamentals are still there.
Sentiment is still bullish. Experts polled by CoinDesk at the end of last year predicted end-of-2017 prices of between $1,400 and $3,000.
While the eventual performance is not that relevant for bitcoin fundamentals, it does signal enough robust support to withstand short-term fluctuations.
Volatility, in context
Much more important than the price is bitcoin’s volatility.
Over the past few months it has fallen to levels generally considered “acceptable” for fiat currencies. This week’s performance will no doubt push bitcoin’s volatility index up a notch, but it’s still less than half of what it was six months ago.
Over the past three months, bitcoin’s volatility (30-day vs the US$) has on occasion been lower than the South African rand, the Brazilian real and even gold. It has been close to that of the yen, the British pound and the euro.
And here’s the kicker: it has achieved this without central bank intervention.
This is what we should be focusing on: bitcoin’s volatility, in spite of this week’s movements, is approaching that of supposedly stable fiat currencies. And it’s doing so on its own.
No fiat currency can say that.
And so, whatever the price movements, bitcoin is successfully showing the world that its value as an independent alternative is strong.
As any economist will tell you, one of the basic requirements of “good money” is that its value be relatively stable.
Low volatility does not produce dramatic headlines, but it is a much more important metric for investors, entrepreneurs and developers. And as new entrants join the market, volumes will continue to increase, sources will diversify, and bitcoin’s volatility will continue its downward trend.