Neither Fiat Currency nor Bitcoin are Free From Volatility
One of the things people love to refer to is how the Bitcoin price is relatively unstable. While there is a certain truth to this story, these same people tend to forget how volatile fiat currencies are as well. A currency like the US Dollar, Euro or Pound Sterling is as volatile as Bitcoin, although […]
One of the things people love to refer to is how the Bitcoin price is relatively unstable. While there is a certain truth to this story, these same people tend to forget how volatile fiat currencies are as well. A currency like the US Dollar, Euro or Pound Sterling is as volatile as Bitcoin, although we are talking about lower volumes here. The question becomes whether or not there is such a thing as a “fair” comparison between fiat currency and Bitcoin regarding volatility.
Also read: The New Economy, Jobs, and Bitcoin
Fiat Currency Creates The Illusion of Stability
A lot of people are under the impression that fiat currencies are somewhat stable. Nothing could be further from the truth, though, as any form of currency that can be used to transfer wealth is anything but stable. However, this type of volatility barely makes the news, and hardly anyone bothers to look up the numbers for themselves because of sticky prices.
It is important to keep in mind that there is a very good reason for why there are so many different fiat currencies in the world today. Nearly every country has its own currency, and not every currency is accepted in each country. Otherwise, there would be no need for foreign exchange offices, which is quite a large market right now.
Whenever somebody exchanges any currency into foreign currency, they will face a volatile exchange rate. Some days are more profitable for exchanging currencies compared to others. The reason for this is quite simple: fiat currencies fluctuate around the clock by nature.
The reason hardly anyone knows or cares about the volatility of fiat currencies is that mainstream media will hardly ever mention it. After all, it is in their best interest to mention this volatility as little as possible, or consumers might get worried. No one wants to create a widespread panic regarding the volatile nature of currency, but that doesn’t mean people should be misinformed.
In a way, fiat currency and Bitcoin are not so different from one another. Both types of currency are volatile, and both trade against major and smaller fiat currencies around the world. But there is also one major difference: Bitcoin is Bitcoin anywhere in the world, whereas fiat currencies have to be converted to and from one another as payments cross borders to find acceptance.
Bitcoin Is Not Stable Either, However…
Let’s make no bones about it, Bitcoin is a far cry from stable. However, that doesn’t necessarily have to be a bad thing, as this digital currency is not controlled by governments or central authorities. In a free market scenario, supply and demand rule, which creates volatility by nature.
One thing to keep in mind is how there have been a lot of early adopters and investors in Bitcoin. Most of these people have gotten their stash of bitcoin at very low prices, and they have sold — or will sell — part of that supply sooner or later. After all, anyone in their position would do the same.
Once people start to liquidate some of their bitcoins, negative pressure on the exchange rate will occur because Bitcoin is still a very “niche” market; these price changes can happen in spectacular fashion. Even though fluctuations of 10% or more on a daily basis are becoming rarer, they will still occur several times per year.
In fairness, there is no such thing as making a fair comparison between fiat currency and Bitcoin regarding price stability or volatility. Both types of currency are volatile by nature, yet they also go through periods of stability. Comparing one to the other is just an example of how uneducated economic experts around the world truly are.
Are Bitcoin and fiat really all that different? Let us know in the comments below!
Partial Source: Diginomics
Images courtesy of Get To Know Bitcoin, Shutterstock