Will Bitcoin Ever Be Stable?
Bitcoin, despite its current market capitalization of $60 billion, remains highly volatile compared to the vast global monetary markets. For Bitcoin to function as a stable currency, its market capitalization would need to reach trillions of dollars, as greater liquidity is necessary to reduce volatility.
Why Does Bitcoin’s Price Fluctuate So Much?
The significant price fluctuations in Bitcoin occur due to its relatively low liquidity. Unlike fiat currencies, which can be easily exchanged for other currencies, commodities, or goods, Bitcoin is less widely used. The majority of central banks and regulators actively work to make it more challenging to buy or sell Bitcoin, leading to a smaller market capitalization and liquidity compared to fiat currencies.
To understand this better, imagine a man jumping into a small pool, causing a large splash and a noticeable change in the water level. Now, imagine the same man jumping into a vast body of water like a lake or ocean. The impact is so insignificant that it doesn’t alter the water level. In this analogy, the man represents a significant investor, and Bitcoin is the water. Currently, Bitcoin is like a small pool, so any large transaction has a noticeable impact on its price. However, as Bitcoin grows and becomes more like a lake or ocean, its price will stabilize, and the market will not be as affected by large transactions.
The Future of Bitcoin
Bitcoin has gained popularity in countries like Venezuela and Zimbabwe, where traditional monetary systems have failed. Some analysts believe that as other national financial systems begin to collapse, Bitcoin and other cryptocurrencies will gain massive trust, adoption, and liquidity. If Bitcoin achieves sufficient liquidity, its price volatility should decrease significantly.
While Bitcoin’s market capitalization is around $60 billion, the most stable currencies in the world are valued in trillions of dollars. If Bitcoin reaches levels of adoption and liquidity similar to dominant government-issued currencies, its price will become much more stable.
Bitcoin Compared to Other Markets
All currencies and assets fluctuate daily in perceived value. Historically, fiat currencies tend to depreciate due to inflation. For Bitcoin, price depreciation could occur from network failures, new regulations, stability issues, better alternatives, or other factors discouraging users. However, unlike traditional currencies, Bitcoin is deflationary, meaning it should appreciate over time. Despite apparent risks, Bitcoin has the best track record among cryptocurrencies and represents a significant financial innovation of our time.
