There are three questions plaguing every cryptocurrency discussion. What will be the price of bitcoin tomorrow? When will cryptocurrency see mainstream adoption? And why is Bitcoin so volatile?
It’s difficult to value bitcoin. Cryptocurrencies are still untested, relatively new and a small industry where minor shifts and market changes affect the price. It’s all speculation that reacts to the reaction of traders and investors.
An accurate forecasting of nascent technology is impossible because it goes beyond the technology to the shifting attitude of people adopting it. There are financial gurus who think the value should be $0 and there are those who think bitcoin will be worth $1,000,000 by 2022.
Each time there’s a piece of news or change, people hop from one side to the other and the shift affects the price.
Why Is Bitcoin Price Volatile?
Every time there’s news that a country is about to regulate bitcoin or geopolitical events and there are statements by governments condemning or banning bitcoins, the price falters. Headline news like bankruptcy of Yapian Youbit, Mt.Gox and most recently, Japan’s Coincheck hacker loss. These incidents and the way it’s reported by the media causes panic and reduced the value of bitcoin. However, the market stabilized after a few weeks, and eventually investors noted that as a sign that the cryptocurrency economy is maturing.
The Law of Supply and Demand
Like other currencies, the laws of supply and demand affect the value of bitcoin. When the volume of trade increase, the price rises. The same applies when traders panic to sell their tokens. The finite quantity of bitcoin in circulation also accounts for the regular price swings. Trading experts at ICO Token News say the smallest change to supply has a huge impact on bitcoin prices.
Bitcoin Has No Fundamental Price to Fall Back On
Regulated finance platforms like the stock market never hit rock bottom because market fundamentals rise again and investors receive dividends on the stock. For example, Microsoft was badly hit when the dot-com bubble burst but their stocks didn’t flatline because they had a fundamental price to cushion the effect. They continued to offer innovative products and operating systems that brought in money for investors.
Bitcoin doesn’t have the same leverage. Even if the full potential of the blockchain technology is achieved, Bitcoin remains purely speculative and its value only rises based on demand.
Bitcoin Trades 24/7
CEO of CommerceBlock, Nicholas Gregory posits that the 24/7 nature of bitcoin trading works against it. Bitcoin is volatile because it’s fixed and difficult to manipulate. Most stock markets and currency trading platforms shut down at some point during the day but cryptocurrency never sleeps, traders don’t get a night off and the intensity is nothing like the world has ever seen before.
Need for Stable Virtual Currency in a Volatile Crypto Industry
BitFlyer’s COO Andy Bryant argues that volatility is a symptom of evolution, one that won’t last much longer. He points out that compared to the foreign exchange market, real exchange and global gold market, bitcoin is a small ship in a sea of larger vessels. He goes further to explain that compared to other asset classes, market moves create outsized price shifts. He expects volatility will reduce when bitcoin becomes fully mainstream.
With the expected launch of the first ETF, futuristic products, more hedge funds and investment brokerage investing as little as 2% of their clients’ portfolios in bitcoin, the market is bound to stabilize.
Any currency that wants to be taken as a medium of exchange needs stability. The problem isn’t limited to cryptocurrency. The more volatile cryptocurrency becomes, the harder it will be for companies, online shopping malls and ordinary people to use digital coins for daily transactions. Fluctuating prices also affect traditional money services like currency conversion, remittance and use of ATMs.
Businesses are hedging their risk through exorbitant fees borne by the final consumer. Some bitcoin ATMs charge up to 15% for currency conversion which defeats the purpose of offering flexible, cheaper alternative payments. Bitcoin must prove its edge over traditional printed money to encourage more mainstream use.
In February 2018, Bitcoin fell by more than 2/3 of its value. It was an all-time high price and investors who got in during late December are angry because they can’t easily cut their losses. Volatility is both a blessing and a curse. On one hand, investors can lose it all within a few minutes of missed opportunities; on the other hand, it provides a medium for traders to utilize swings for large daily profits.
Can Stable Coins Bring Cryptocurrencies to Mass Adoption?
Much like Litecoin and Bitcoin, stable coins are digital tokens created to provide security and stability in the cryptocurrency economy. Across the world of fintech, they’re expected to have substantial implication and broad applications. Stable coins hold value for longer periods which allow investors to send remittances across countries without fearing price movement over the duration of one block confirmation.
For example, the US dollar and gold are perceived as stable assets. The price of gold is independent of the stock market. It can’t be controlled or manipulated by a central bank. The US dollar, while regarded as a safe asset, is subject to inflation and bubbles created by a central bank. Stable coins are backed by collateral to achieve stable value. A truly decentralized crypto economy will need stable coins with the attributes of gold.
Stable Coins Worthy of Note
Bitshares was launched by Daniel Larimer in 2013 with different components such as decentralized exchange, distributed Autonomous Companies and most importantly bitUSD, the service’s first SmartCoin. Bitshares claim the smartcoin’s full value is backed by their core currency BTS which can be changed at an exchange rate determined by a trusted price feed.
TrueCoin’s Smart Coin
TrueCoin Project is creating a dollar-backed stable coin that is legally protected, 100% collateralized and transparently audited. Backers include Blocktower capital, Founders Fund Angel and Stanford-startX. The developing team are from Palantir, Stanford and Google, with legal backing from Arnold & Porter and Cooley. Their focus is to create a solution for today’s market and provide practical, reliable, scalable means for traders and investors who want a working solution.
There are many use cases for stable coins. They can be applied to credit card payments, act as loan collateral and used as reserve asset on crypto exchanges. In third world countries experiencing extreme currency inflation, it could serve as a de facto currency that provides stability for their economies. The goal remains the same; ease volatility concerns, increase use of cryptocurrency and push it closer to mass adoption.