I recently read an interesting article: Bitcoin Volatility Will Match Major Fiat Currencies by 2019. The article, written by Will Woo, analyzes Bitcoin’s volatility over time by charting the volatility trend lines for Bitcoin and the Euro.

The chart indicates Bitcoin volatility is declining and will match fiat currencies by the middle of 2019. Admittedly, this analysis was done before the recent upheavals in the cryptocurrency markets. I would be interested to see how recent events affect this analysis. Regardless, the article takes a longer term view of Bitcoin’s volatility trend to show that it is decreasing relative to fiat currencies.

Does a decline in volatility mean more people will use Bitcoin in their daily lives? Will it become more common for people to use Bitcoin for common purchases? I think Bitcoin will continue to become more widespread. However, I don’t think that the decrease in volatility will necessarily drive adoption.

The volatility of Bitcoin and dollars have very different affects on the price of goods. This is because prices are denominated in dollars. If Bitcoin decreases against the dollar, the price of U.S. goods in Bitcoin increases proportionally. However, when the dollar declines against the Euro, the price of U.S. goods in dollars does not change all that much.

When the dollar loses value against a foreign currency the main effect is on prices of imports and exports. The effect on domestic goods is mitigated by the fact that the US dollar is used widely as a unit of account. Many of the inputs to make the goods we buy are also denominated in dollars. For example, wages don’t change simply because the dollar’s value declines.

The same cannot be said for Bitcoin. Because, things bought with Bitcoin are denominated in fiat currency, exchange rate fluctuations have a direct affect on the price of goods in Bitcoin.

One can get a better idea of the stability of prices in Bitcoin by using the Consumer Price Index (CPI). The CPI tracks the price of a basket of goods over time to measure inflation. To assess the stability of prices in terms of Bitcoin, I looked at the month-over-month change in the Consumer Price Index. I took the average Bitcoin price for the month and converted the CPI for that month to Bitcoin prices. Admittedly, there are limitations to this approach. It is not intended as a rigorous analysis, but as rough indicator of price stability.

The chart shows that Bitcoin prices for goods are still very unstable. There are monthly swings in prices of goods in Bitcoin of nearly 50%. This is still a critical limitation for Bitcoin’s feasibility as a medium of exchange.

Too much focus has been given to Bitcoin’s exchange rate volatility. We should be looking at the volatility of the price of goods in Bitcoin. The relationship between the exchange rates and prices is fundamentally different for Bitcoin than for fiat currencies. This is because few businesses use Bitcoin as an accounting unit. Bitcoin’s exchange rate volatility may soon match that of fiat currencies, but that may not be enough to provide stable prices as a medium of exchange.

Author — Raul Reynoso

I am fascinated by this nascent blockchain revolution and the incredible innovation it’s generating. I write to shed a light on new developments and better understand where this is all going. My views are my own. They are informed by my background in policy analysis, software engineering, and entrepreneurship.

Follow me on Twitter @rulioX

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