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Bitcoin Volatility and Other Commodity Price Stability

Bitcoin volatility is one of the most used arguments against the cryptocurrency, but stability in commodity prices is a myth. Thus, assuming that Bitcoin prices are not yet ready for public use because of price volatility is a weak criticism based on a false assumption that price stability is somehow a sign of an accepted, adopted commodity. In reality, market-based prices move, constantly. This means Bitcoin’s price will always be unstable and it is time to accept that and move on to solving actual cryptocurrency problems instead of chasing myths.

The Myth of Commodity Price Stability

Commodity trading is a well-established and highly regulated practice. Commodities that are traded in open markets are based in industries with millions of globally distributed professionals. Farmers, shippers, manufacturers, distributors, consumers, and even governments all want stable prices for the commodities they produce or consume and yet these prices remain highly unstable. For example, the past five years of price data for three of the most highly regarded commodities show that price fluctuations in commodity markets are not alarming, they are simply normal.

Corn

In the US, corn sales generate around $40 billion per year in revenue and according to Scientific American magazine “no other American crop can match the sheer size of corn.” Corn is used for animal feed, biofuels, and as ingredients in many consumer foods. Corn is not new. The Encyclopedia Britannica states that corn is believed to have been first cultivated by farmers in Mexico over 10,000 years ago. Corn has a long history and is big business and but is the price stable? No. The price of corn, over the past 5 years has seen a high of $520 per bushel (2014) and a low of $300 per bushel (2016). A drop of 42% over a two-year period is not a stable market.

Oil

A little-known fact is that almost all wars ever fought have been disputes over resources. A more well-known fact is that wars are being waged today that are closely linked to access to oil. In fact, according to the Harvard Kennedy School “oil is a leading cause of war: between one-quarter and one-half of interstate wars since 1973 have been linked to oil.” The reason for this is that modern machinery and plastics both depend on oil consumption. Oil is to modern society as water is to the human body. Prior to oil, most wars were fought over access to food and water. Humans have sadly advanced to fighting over other commodities. Nonetheless, kingdoms are made, armies are raised, and cities are built on the sale of oil. According to the BBC, the modern oil industry was not born until 185, however, history records oil’s first uses as far back at 3,000 B.C. by the Babylonians. Once again, we have a highly regulated market setting the price for a commodity. This commodity has been used for thousands of years. Wars have been justified by price movements in this commodity, but is the price stable? No. The price of oil over the past 5 years has seen a high of $106 per barrel (2014) and a low of $26 per barrel (2016). Prices that have fallen 75% over a couple of years is not a stable market.

Gold

Gold needs no introduction. Throughout human history gold has been one of the most common forms of money, because it is a small token the represents wealth that can be transferred hand to hand, pocket to pocket. Bitcoin is often called “digital gold” because like gold it can be traded pocket to pocket without the backing of government agencies, but with Bitcoin, for the first time, this all happens online. The gold market may be the oldest, most regulated market in the world, but is it stable? No. Specifically, the price per ounce of gold over the past 5 years saw a high of $1,390 (2014) and a low of $1,045 (2015) which was followed by a bull run over the next six months back to $1,375 and then back down to $1,100 the subsequent six months. Down 25%, up 32%, down 20%, gold is not a stable market.

Corn, oil, and gold all have well-established intrinsic value, all have highly regulated markets, and all have hundreds of years of global trading history, yet they are all traded in highly volatile markets, rising or falling by as much as 75% within the past five years alone.

Why Bitcoin Prices Remain Unstable

As stated above, market-based pricing means price instability. That is how market-based pricing works. More worthwhile than longing for the day when Bitcoin prices are stable is trying to understand the market forces that drive Bitcoin’s price instability. There are two main drivers of market-based prices: supply and demand.

Demand: Assuming the Bitcoin supply were to remain constant, as adoption increases, demand increases driving prices higher. However, Bitcoin supply is not constant. Bitcoin is mined and more Bitcoin are released every 10 minutes. Yet, Bitcoin still operates on a deflationary model of sorts because the amount of new coins entering circulation is dwindling over time.

Supply: Assuming market demand remains constant, over the years, demand will likely outstrip supply and Bitcoin price would then rise. However, Bitcoin demand is not constant. Bitcoin adoption has been increasing over the years. I have estimated cryptocurrency adoption rates at less than 2% of those in the world capable of owning Bitcoin and thus in my opinion, adoption rates will most likely continue to increase.

In combination, market forces impacting supply and demand point to further price gains for Bitcoin over the coming years. Although cartels attempt to impose deflationary models on corn, oil, and gold, they do not truly have the guaranteed steady deflationary forces at play in Bitcoin. Corn, oil, and gold price rises are most likely attributed to the world’s population growth and economic expansion both increasing demand. The good news for Bitcoin is that it too has the advantage of increased adoption from population growth, economic expansion, but it also has assured immutable deflation.

Bitcoin Prices Rise Over Time

Yes, Bitcoin’s price moves, but using that fact as a criticism assumes the eventual existence of a myth: that Bitcoin’s price deserves to be stable and will one day be stable. Rather, a review of the market forces that drive commodity and Bitcoin prices predict that Bitcoin’s price will not become stable but instead will continue to rise over the years. The next time someone tells you Bitcoin is too unstable please point out that oil, gold, and corn will outlast us all and those markets are highly unstable, or better yet, just send them this article.

To continue this discussion, find me on Twitter.

Featured Image: DepositPhotos/ mkarco

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