How Stable Is the Bitcoin Market?
It's notoriously volatile, but could the Bitcoin market be stabilizing?
Warren Buffet called Bitcoin "rat poison squared" before stating that Bitcoin and other forms of digital currency "will come to bad endings."
Considering that, at the time of the May 2018 interview with CNBC, the Bitcoin price had recently gone from $5,000 to $20,000 in just a few months, I agreed with Buffet when he made that comment.
It seems that most of us only hear about Bitcoin when its value has made a dramatic change in one direction or the other. Since July 2018 though, when Bitcoin's price came back down to around $6,000, Bitcoin has been making headlines for its stability rather than its volatility.
This leaves people asking: "Can we expect it to stay that way?" After all, the digital cash system is notoriously unpredictable.
Furthermore, what criteria would the Bitcoin market have to meet to be considered stable? A stable market is defined as a market that is able to handle a large volume of trades, such as foreign exchange transactions, without causing large shifts in the price.
Bitcoin is now a decade old, and we have more data on Bitcoin exchanges than ever before. Surely, we can draw some useful inferences by merely observing Bitcoin's behavior patterns over the last several years.
The first time I heard about Bitcoin was in 2013, when a handful of people who had paid a few bucks for a Bitcoin, and forgotten about it, woke up one morning as millionaires.
At the time, the Bitcoin market was still mostly underground, and was utilized primarily by people who wanted to buy and sell illegal goods on the dark web.
Luckily, according to the laws of supply and demand, not many people were using Bitcoin for nefarious reasons. Otherwise, the drastic increase of how the price of Bitcoin was determined wouldn't have been so affected by the few people who may have been buying into it.
That said, Bitcoin's peer-to-peer system does diverge from the standard principle of supply and demand because it's deflationary, and its supply has an inverse correlation with demand.
There will never be more than 21 million Bitcoin in the world, and the only reason there would be fewer would be that people are hoarding them. Therefore, when there is a high demand for Bitcoin, the supply decreases, and the Bitcoin price increases.
In other words, the stability of the Bitcoin market solely depends on how many people are investing in it. Since Bitcoin exchanges are decentralized, there are many forces that could potentially impact its stability.
For example, anyone in the world can access Bitcoins; so, if one country's economy performs poorly and their people flock to Bitcoin exchanges, that country could impact the Bitcoin price for everyone else.
According to the above definition of a stable market, it would be impossible for Bitcoin to be stable. Perhaps, however, Bitcoin's definition of stability is different to the one that people usually use to analyze markets.
Bitcoin is still a baby, but, in the short time that we've been able to study its behavior, we've learned that it might be more predictable than it seems.
Furthermore, in the ten years since Bitcoin entered the scene, it's clear that there is a specific correlation between how Bitcoin compares versus gold and fiat money like that of the US dollar.
When the US dollar declines, the Bitcoin price goes up, which is apparently due to people moving their eggs over to the Bitcoin basket when they lose confidence in the dollar.
The relationship between Bitcoin's value, supply, and demand is what has made Bitcoin so volatile in the past, but could that change?
The first time the Bitcoin price shot up was in 2013, and a handful of people became millionaires overnight. Bitcoin then started making headlines around the world, and Wall Street investors, in turn, got a lot of phone calls from interested clients.
Unsurprisingly, the hotshot investors on Wall Street decided that researching Bitcoin would be worth their precious time. Their findings gave us mixed signals—at least until recently when Bitcoin started to appear more stable.
In August 2018, the Intercontinental Exchange (ICE) announced plans to launch a platform that would make Bitcoin exchanges more accessible and easier to operate. This platform, called Bakkt, aims to provide "an open, seamless global network to enable you to buy, sell, store, and spend digital assets simply, safely, and efficiently."
So, what does this mean for the Bitcoin market?
It means that Bitcoin exchanges are about to be more accessible than ever. Before now, you had to jump through a lot of hoops if you wanted to get a slice of the Bitcoin pie, and that deterred many people from buying into it.
Investors will buy huge sums of Bitcoins to trade on the platform, which would allow the Bitcoin market to stabilize and grow in value as more people invest in them.
On October 31, 2018, Morgan Stanley published a report called "Bitcoin Decrypted: A Brief Teach-in and Implications," which discussed the evolution of Bitcoin and perceptions of it. Is Bitcoin a store of value, like gold, that can protect your wealth from inflation?
According to Morgan Stanley, Bitcoin isn't a digital currency, and it isn't a store of value, either. Bitcoin, according to the report, is an institutional asset class, like real estate, stocks, and other tangible assets with a high risk-reward.
It might be worth putting a few bucks toward the Bitcoin market, but don't bet your life on reaping any rewards. Just because there are signs Bitcoin is going mainstream doesn't mean anymore people will become millionaires in the matter of hours.
If you're interested in buying a piece of the pie, you should do it at a time when the demand for Bitcoin is at a low point and when the US Dollar and Dow Jones are going strong.
Also, if you're worried about being affected by a financial crisis, it wouldn't hurt to invest in Bitcoin. Judging by the way Bitcoin's uncentralized peer-to-peer system works, Bitcoin's value will probably increase the next time there's a recession.