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Is Bitcoin’s Volatility a Feature or a Bug ?


Mar 27, 2018 Posted /  1617 Views


Is Bitcoin’s Volatility a Feature or a Bug ?

Price Volatility In the Economic Sense

In classical Economics, volatility is the rate at which the price of a security increases or decreases for a given set of returns. To determine the volatility, the standard deviation of the annual returns is calculated over a given time frame. The range to which the price of a security may increase or decrease can be shown by its volatility.

Making a choice whether to invest in a given security or not can be guided through a detailed study of the volatility of the asset. Option Trading platforms use this principal in developing option pricing formula used in gauging the fluctuations in the returns of the underlying assets. The pricing behavior of a commodity can be clearly indicated by its volatility

The volatility of a commodity can be assorted in two categories that are high and low volatility. High volatility occurs if the prices of the security fluctuate rapidly in a short duration of time while low volatility occurs when the prices of the commodity fluctuate slowly in a longer time span.

How Volatility is Affecting Bitcoin

The constant changes in the prices of bitcoin have resulted in catastrophic effects for bitcoin adaptation. Many bitcoin traders made huge losses in a matter of days due to the significant reduction in the price of bitcoin. Some of these traders sold off their remaining credits at whatever price they could obtain and quit bitcoin trading soon afterward.

Bitcoin has developed to a point many analysts refer to as nearing a mainstream adoption, the constant price variation further hampered the meager chance of bitcoin getting mainstream. Governments loss trust on the cryptocurrency and many referred to it as a market bubble discouraging its uses among citizens.

Small-scale retailers who had started adopting bitcoin as a payment option for their products soon withdrew the bitcoin payment option due to the constant price fluctuation bitcoin suffered. This price fluctuation made it risky to store bitcoin as it’s values would constantly be changing. Exchanging small amounts of bitcoin constantly is further way very expensive to do for every transaction the store would receive.

Is Volatility a Feature?

However, some experts argue that volatility is not a defect in the bitcoin protocol but rather a feature of the cryptocurrency. Other commodity markets apart from cryptocurrencies’ or bitcoin’s are also affected by price volatility. Markets like oil and the stock markets are also majorly affected by price volatility.

It is essential to note that volatility itself is not a feature but there are some other features that fuel volatility of a commodity. Every trade markets bear their factors which are more pronounced in the agricultural and the oil industry. Existing limits and down conditions, banning short selling, limited trading hours and removing other commodities are among the key factors causing volatiles in the prices of bitcoin.

In conclusion, its clear to us that volatility is not a feature in bitcoin although it is not even a bug. Volatility is rather a market condition that affects all commodity markets and is caused by factors that are inflicted on the market. Measures to offset volatility can help reduce negative regulations and bans on bitcoin and make the cryptocurrency more generally accepted.  


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