Breaking ChatGPT’s Bitcoin FUD #5: Price Volatility

According to ChatGPT, the fifth most serious threat to the Bitcoin project is the price volatility of the bitcoin currency. The assumption around this statement is that the constant and unpredictable swings against fiat money are supposed to deter people from adopting BTC as a medium of exchange and/or store of value.

There are two ways to break this FUD, which also happens to be the most popular in mainstream media: one is technical, the other one is comparative. The former is introspective, the latter questions the meaning of the word “volatile” by presenting recent examples from the supposedly “stable” financial world.

First of all, let’s do a little bit of technical analysis on the price of bitcoin. For reference, we’re going to use the values provided by the BTC/USD chart on the Bitstamp exchange – which has been tracking the price since August 2011. Over the course of nearly 12 years, BTC went up 243,207%. The price discovery phase has witnessed 3 distinct bull cycles and the same number of bear markets. And on the longer term (3-4 years), the volatility has always been upwards – which made bitcoin a pretty good store of value.

Furthermore, there’s a lot to be said about how volatility decreased over time. Just by looking at the long-term logarithmic chart, one can notice how both green and red candles were bigger back in the day. The liquidity was lower, the number of users was likewise smaller, and it was easy for a few whales to manipulate the price in either direction. But as adoption grows, a larger number of users transact with bitcoin on a regular basis. And as the BTC amounts end up in more hands, the volatility also decreases.

This isn’t a mere theoretical observation – you can see it in the amount of resistance and bounce-backs that take place after every dump. For every seller, there are instant buyers around the world. And even when the price is oversold, you will always find someone on the other side to immediately buy the dip. It appears that the trading became a little more professional, with resistance patterns that one can also notice on Wall Street. With each boom-crash cycle, the downwards volatility also gets lower.

During the 2013 bull market, the price rose to $1237 in December – only to crash to $687 three days later. During the coming bear market, bitcoin went as low as $179.13 in early 2015. That’s a 85.5% drop in about a year, which was a consequence of poor exchange development and limited options to buy and trade bitcoin. As the financial infrastructure and adoption increased, the situation got better.

The situation changed a little bit during the 2017 bull market, when the amount of liquidity clearly increased. The December 15th all-time high was $19345, while the 2018 bottom happened at around $3196. This was great for early adopters, but really painful for everyone who bought around the top – as the 83.4% drop was lower than the previous one, but still brutal.

If you’re reading this, then you most likely already know the story about the November 2021 all-time high of $68789 and the bottom of $15877 which came a year later. This time, the gap between the top and the lowest point is of 76.91% – thus indicating more resistance and conviction in the asset. While the numbers are still not ideal, they do point out to a gradual lowering of volatility.

Regardless, this data is still not good enough for mainstream economists and journalists. They will claim that even a 5% daily movement is too volatile for a currency. As December 2013 proved, the price can drop by 44.4% in only 3 days! So this is neither a store of value, nor a medium of exchange. Central banks under the fiat money standard will prevent this from happening, right?!

The following counter-arguments are only a few examples that happened in 2023: on March 10th, Silicon Valley Bank failed to survive a bank run. A couple of days later, Signature Bank followed. Two “too big to fail” institutions, which managed money deposits worth billions of dollars and whose customers were important start-ups from the technology industry, went to 0 and needed the US Federal Government to step in to bail out the depositors.The next day, all hell broke loose in the land of regional US banks: the stocks of First Republic Bank plunged be 70%; PacWest Bancorp also lost more than 40% in stock value; and then Western Alliance Bancorp stocks witnessed a 30% drop. Just in case it wasn’t clear already: all of this happened in a single day.

In Europe, Credit Suisse (the 2nd largest bank in Switzerland) witnessed a 25% stock crash which resulted in the Swiss government getting involved to arrange a buyout by UBS (Switzerland’s largest bank). This was a soft bailout, as Credit Suisse’s efforts to take loans and sell some of its property only resulted in increasing the magnitude of the bank run. In France, BNP Paribas stocks also collapsed by 8% in a single day – which resulted in interventions to halt trading.

So when bitcoin lost half of its market valuation within 3 days in December 2013, the outcome wasn’t as dramatic as some of the events that first world bank depositors experienced in March 2023. After all, Bitcoin was a new project with low liquidity and a relatively small community of traders. It wasn’t some 166 years-old Swiss bank, it wasn’t the institution which banked most of Silicon Valley’s start-ups, and the project didn’t promise to perform banking duties or have low volatility by virtue of tradition or government intervention.

Bitcoin exists in a purely free market where the price dynamics are imposed by supply and demand. There is no central bank to halt trading when the currency is oversold or to bail out users who lose their coins. There is no support desk to call when someone steals your BTC or you forget your passphrase. Also, there is no entity to decide that they should stabilize the price during times of high volatility. Every individual actor is his own bank, every person decides when is the best time to buy or sell, and everyone is responsible for securing their own access keys.

This may sound wild and frightening, but it works specifically because bitcoiners understand sovereignty, responsibility and scarcity. Bitcoiners also know that this financial computer network emerged at the peak of the 2008 financial crisis, when private banks were getting bailed out by their governments. Which is why high volatility under a free and honest system is preferable to crony capitalism.

But then again, what is volatility anyway? Since we established that “safe”, “insured” and “too big to fail” banks can provably take daily plunges bigger than anything bitcoin has witnessed thus far, why aren’t we complaining about these financial institutions being volatile and unsafe? Well, the most obvious answer is that banks control politicians and media outlets through funding. Not only that, but Chat GPT itself was financed by Microsoft and a bunch of VC firms that aren’t quite Bitcoin-friendly. Their role is to preserve an old and well-established tradition, so anything that threatens their position must receive criticism at every step.

Another argument is that witnessing the collapse of banks is generally regarded as a “black swan event” because it occurs less frequently than a swing in BTC price. On a short-term chart, bitcoin appears to be more volatile because there is no central entity to set a daily exchange rate and sometimes people around the world can coordinate impactful events. But bank runs are also real – as we have witnessed in the first half of 2023, they’re extremely fragile to mass withdrawals due to their high-risk approach to holding very little reserves. They exist at the mercy of central banks and governments, which may or may not bail them out in critical moments. And on a long enough term, they all fail.

What’s interesting about Bitcoin the network and its underlying currency is that so far we’ve witnessed a trend of resilience against price volatility. For instance, Tesla famously bought bitcoin in 2021… only to sell it later in the year. The same happened with many hedge fund managers and large companies which invested a percentage of their money in BTC. But even during the moments when the big investors started leaving, the network had true believers who kept the project alive.

Bitcoin kept mining blocks every 10 minutes even when the miners weren’t making much of a profit. Full nodes kept on storing and validating the entire ledger of transactions even in the absence of economic incentives. And developers kept on proposing refinements to the code even when nobody was paying them. Can anyone make similar statements about bankers going to work when they no longer get paid and institutions processing payments 24/7 in spite of dealing with tough market conditions?

Ultimately, the demand for bitcoin is proportional with the demand for freedom. For as long as people around the world get oppressed, abused, cheated, and robbed by institutions (governmental or private), the quest for financial sovereignty will continue. Free markets are much more resilient and have purer motivations than any form of centralized control. And as governments become more Orwellian and central banks print their way out of trouble while putting multiple generations into debt, Bitcoin is here to provide that hopeful escape from it all. What’s more volatile, something that changes at the whim of despots and irrational bureaucrats, or a system which relies on math and game theory?