High Bitcoin volatility explained

[kryptorian]

I want to share my opinion on the question of Bitcoin's high volatility, but it is just an opinion so please be patient with me. I've read a few topics here and there where people ask about Bitcoin's volatility, its causes, and whether it is going to end one day if ever. Below is my take on the matter.

People want to know when we will reach the state of more or less stable cryptocurrencies and whether it is possible at all. I think that without wide adoption in the real sector the volatility of cryptocurrencies is not going anywhere. The reason is quite simple, and you don't need to be an Einstein of economics to understand that. For example, fiat currencies have wide application in the real world. You can buy food, water, clothes, whatever with them. In short, you always know how much 1 or 1,000 dollars can buy, and this sets the reference point for the dollars worth of things. And this is the main reason why volatility of major fiat currencies is constrained. Let's take the dollar as an example here. If the dollar becomes undervalued in respect to goods which can be bought with it, people start exchanging other currencies for it, and the dollar value rises. On the other hand, if the dollar is overvalued in respect to the same basket of goods, people start selling it for other currencies, and the dollar value falls. In both of these cases, the effect is diminished volatility.

With mostly speculative assets like cryptocurrencies, it doesn't work like this because there is no such point of reference. Therefore, there is no limit for volatility either. The bottom line is that if we want lower volatility of cryptocurrencies, we need wider application of them in the real world. We need them to be extensively used in commerce as a means of exchange for goods and services, not as a vehicle for speculation.

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[buytheeffinD]

Correct but also you have left out of the equation is how the units are viewed. It is tough to say and understand that a t-shirt cost 0.00000134 bitcoins but rather it is easier to say that t-shirt is 2 millibits.

[Omega Weapon]

I want to share my opinion on the question of Bitcoin's high volatility, but it is just an opinion so please be patient with me. I've read a few topics here and there where people ask about Bitcoin's volatility, its causes, and whether it is going to end one day if ever. Below is my take on the matter.

People want to know when we will reach the state of more or less stable cryptocurrencies and whether it is possible at all. I think that without wide adoption in the real sector the volatility of cryptocurrencies is not going anywhere. The reason is quite simple, and you don't need to be an Einstein of economics to understand that. For example, fiat currencies have wide application in the real world. You can buy food, water, clothes, whatever with them. In short, you always know how much 1 or 1,000 dollars can buy, and this sets the reference point for the dollars worth of things. And this is the main reason why volatility of major fiat currencies is constrained. Let's take the dollar as an example here. If the dollar becomes undervalued in respect to goods which can be bought with it, people start exchanging other currencies for it, and the dollar value rises. On the other hand, if the dollar is overvalued in respect to the same basket of goods, people start selling it for other currencies, and the dollar value falls. In both of these cases, the effect is diminished volatility.

With mostly speculative assets like cryptocurrencies, it doesn't work like this because there is no such point of reference. Therefore, there is no limit for volatility either. The bottom line is that if we want lower volatility of cryptocurrencies, we need wider application of them in the real world. We need them to be extensively used in commerce as a means of exchange for goods and services, not as a vehicle for speculation.

Wider applications for cryptocurrency comes with more money and that comes with more volatility as well, volatility is not going to subside until we reach a point in which the cryptocurrencies market begin to move a significant amount of the wealth of the world, that will make very difficult for banks and governments to move the price that much but even then volatility will be greater than in other markets.

[koehlebd]

I want to share my opinion on the question of Bitcoin's high volatility, but it is just an opinion so please be patient with me. I've read a few topics here and there where people ask about Bitcoin's volatility, its causes, and whether it is going to end one day if ever. Below is my take on the matter.

People want to know when we will reach the state of more or less stable cryptocurrencies and whether it is possible at all. I think that without wide adoption in the real sector the volatility of cryptocurrencies is not going anywhere. The reason is quite simple, and you don't need to be an Einstein of economics to understand that. For example, fiat currencies have wide application in the real world. You can buy food, water, clothes, whatever with them. In short, you always know how much 1 or 1,000 dollars can buy, and this sets the reference point for the dollars worth of things. And this is the main reason why volatility of major fiat currencies is constrained. Let's take the dollar as an example here. If the dollar becomes undervalued in respect to goods which can be bought with it, people start exchanging other currencies for it, and the dollar value rises. On the other hand, if the dollar is overvalued in respect to the same basket of goods, people start selling it for other currencies, and the dollar value falls. In both of these cases, the effect is diminished volatility.

With mostly speculative assets like cryptocurrencies, it doesn't work like this because there is no such point of reference. Therefore, there is no limit for volatility either. The bottom line is that if we want lower volatility of cryptocurrencies, we need wider application of them in the real world. We need them to be extensively used in commerce as a means of exchange for goods and services, not as a vehicle for speculation.

Wider applications for cryptocurrency comes with more money and that comes with more volatility as well, volatility is not going to subside until we reach a point in which the cryptocurrencies market begin to move a significant amount of the wealth of the world, that will make very difficult for banks and governments to move the price that much but even then volatility will be greater than in other markets.

I think you are right. There would have to be much more real world application before the volatility dies down. And before there is more real world applications there will be more volatility.

[gambitcoin53]

in short, the law of supply and demand is being applied in bitcoin, it is easier to comprehend that when the demand is low, the price will go down, but when the demand is high, surely the price will hike, but there are two issues here, one is bitcoin price itself on the market, there are limited bitcoin in the market that dictates bitcoin price, when bitcoin holders trade it, the supply of bitcoin increases therefore resulting bitcoin price to plunge, when we buy bitcoin, the demand increases resulting high price. people buying and selling creates traffic, that is called volatility of bitcoin

 second, when we talk about the use of bitcoin in terms of buying power over goods and products today, we can say it is limited only because of acceptance of stores and establishment that accept bitcoin as payment. since it is limited, buyers are uncertain to put in exchange sites and uncertain to use it to buy stuff. therefore, forced to sell it at a higher price rather than spend it. then we come back to bitcoin trading. and the chain begins again and again, resulting bitcoin volatility, as long as bitcoin is not widely accepted to common and physical store, it will remain in our virtual wallets.

[Hydrogen]

fiat currencies have wide application in the real world. You can buy food, water, clothes, whatever with them. In short, you always know how much 1 or 1,000 dollars can buy, and this sets the reference point for the dollars worth of things. And this is the main reason why volatility of major fiat currencies is constrained. Let's take the dollar as an example here. If the dollar becomes undervalued in respect to goods which can be bought with it, people start exchanging other currencies for it, and the dollar value rises. On the other hand, if the dollar is overvalued in respect to the same basket of goods, people start selling it for other currencies, and the dollar value falls. In both of these cases, the effect is diminished volatility.

Bolded ^.

First, it helps to know the dollar is significantly undervalued in contrast to inflation. Real inflation is close to 10%. In considering the cost of food, rent and water price inflation, actual inflation is higher than 10% in some areas. Inflation is also growing at a faster rate than wages which should be a major concern but goes unreported.

Inflation Actually Near 10% Using Older Measure

After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.

“Given Walmart’s sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.

To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.

Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across Shadowstats.com. The voting member did, after all, mention Volcker in the same speech.

“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”

https://www.cnbc.com/id/42551209

The dollar retaining its value could have more to do with credit ratings agencies, regulators and others responsible for maintaining the stability of the US economy doing everything they can to avoid reporting real issues. The 2008 bank crisis came with no more than 24 hours warning due to regulators turning a blind eye to relevent issues for years. It might be safe to say the current era isn't vastly different.

Any problems with the dollar will likely go unreported until its too late, the same way the 2008 crisis did.

[kryptorian]

fiat currencies have wide application in the real world. You can buy food, water, clothes, whatever with them. In short, you always know how much 1 or 1,000 dollars can buy, and this sets the reference point for the dollars worth of things. And this is the main reason why volatility of major fiat currencies is constrained. Let's take the dollar as an example here. If the dollar becomes undervalued in respect to goods which can be bought with it, people start exchanging other currencies for it, and the dollar value rises. On the other hand, if the dollar is overvalued in respect to the same basket of goods, people start selling it for other currencies, and the dollar value falls. In both of these cases, the effect is diminished volatility.

Bolded ^.

First, it helps to know the dollar is significantly undervalued in contrast to inflation. Real inflation is close to 10%. In considering the cost of food, rent and water price inflation, actual inflation is higher than 10% in some areas. Inflation is also growing at a faster rate than wages which should be a major concern but goes unreported.

Cut your post to get some space here.

For the record, I don't disagree with your view that the real inflation is well above the reported. But it is the same with other currencies too. Therefore, it is kind of level playing ground for all top currencies which are traded against the dollar. And whenever one currency becomes "unfairly" expensive or cheap in respect to others, this leads to a price-equalizing effect which I described in OP. In the cryptoverse though, there is no such thing. Exchange rates between different coins can be arbitrary and completely out of proportion with respect to "real" value determined by their actual use.