Bitcoin: will volatility last forever, or not?

A debate has been ignited these days about the future of Bitcoin, and in particular its distinctive volatility. 

Bitcoin: doubts about volatility

So far over the years, the price of Bitcoin has been particularly volatile. 

Excluding the early years, that is, those before the first halving in late 2012, the annual excursion between highs and lows has been decidedly high. 

For example, in 2013 it fluctuated between $13 and $1,100, while in the following three years it fluctuated between about $170 and $1,000. 

In 2017 it oscillated between $750 and $20,000, and in the following three years it moved in a range between $3,200 and $29,000. 

Since the 2021 bull run, however, things seem to have changed, because the oscillation has been between $29,000 and $69,000, which is much lower than in the previous two years in which a post-halving bull run occurred (2013 and 2017). 

For this reason, there are those who argue that in the long run, Bitcoin’s price volatility is actually bound to inevitably decline, while others argue that it will remain high. There is also the intermediate hypothesis in which it will decline while remaining significant. 

Those who argue that it will remain high do so because they consider volatility to be an inherent feature of Bitcoin’s price, since the creation of new BTC is totally inelastic to the market. But the difference between volatility being as high as it has been in the past, and volatility that is merely significant but not resounding, is remarkable. 

For example, Francesco Simoncelli points out that over time the volatility of gold-backed coins has also gone from high to moderate. 

Ancora sul dibattito Rochard/Weiner su #Bitcoin.
Rochard ha affermato ingenuamente che la volatilità su #BTC rimarrà. Questo non è corretto, perché man mano che gli speculatori verranno sostituiti da imprenditori, essa si attenuerà come già accaduto all’oro in passato. pic.twitter.com/8ILdko3UWg

— Francesco Simoncelli (@Freedonia85) August 17, 2022

Bitcoin is often compared to gold, and used as a form of protection against arbitrary inflation of the money supply of current fiat currencies, somewhat like gold itself. So if the inflation rates of gold-based currencies were also once very high, but over the decades have faded a lot, then perhaps the same could also apply to Bitcoin. Moreover, as of 2021 this dynamic already seems to be in place. 

If indeed Bitcoin were destined to partly replace gold in the financial markets, for example as a form of protection against the ultra-expansionary monetary policies of central banks, then the dynamic that has seen gold coin inflation fall dramatically over time could be repeated on the price of Bitcoin as well, thus reducing volatility over the medium and long term. 

However, it is worth noting that BTC‘s success in the financial markets is due precisely and primarily to its volatility, which makes it a very attractive asset for speculative purposes. However, in the future speculators may be replaced by long-term investors, or entrepreneurs, and this may give Bitcoin a new and different role in the financial markets. 

For this reason, the intermediate hypothesis, namely that volatility will decrease but not go to zero, should not be neglected at all.