Critics of Bitcoin call its volatility an unsolvable setback for digital gold to become a full-fledged investment asset.
Analysts at Fidelity, the largest asset manager, decided to dispel this fear. They stated that despite the fact that "bitcoin is fundamentally unstable," this does not prevent it from fulfilling "its ultimate investment objective of preserving wealth over long time periods."
What arguments does the global asset manager give to confirm the investment attractiveness of Bitcoin? I'll tell you in this review.
The debunking of concerns about the volatility of cryptocurrencies was stated in Fidelity's latest issue of "The Research Round-Up." In its longer analysis, the company cited oil and gold as examples to explain the entire volatility process.
Here are the highlights of the review.
Fixed supply affects the price
Fidelity states that "Bitcoin is unique in that it is a good whose supply is completely inelastic to changes in price. In other words, supply does not and cannot change in response to price."
We are well aware that the mining limit is only 21 million bitcoins. And that's it, no more coins will be issued. Unlike other goods that have a cycle, which Fidelity explains this way:
"Going back to economic principles, we know that when demand increases for a good, in the short-term the price will rise. However, the higher price then incentivizes suppliers to produce more. More supply will then bring down the price.
With bitcoin, supply cannot change regardless of what price does. Therefore, any change in demand, short-term as well as long-term, will have to be reflected by changes in price."
Therefore, in the situation with bitcoin, the laws of supply and demand can only affect the price, and they do. "There is no change in supply to dampen the effect of price moves, even over the longer-term."
This is paired with the ever-dwindling supply of new coins due to halving, and you have the perfect recipe for what bitcoin proponents call "number go up technology."
Fidelity sums up this argument like this:
"Bitcoin is valuable because it has a fixed supply and it is also volatile for the same reason." These two features come in the same package.
Bitcoin is a better store of value than the U.S. dollar
"Something that has low volatility is not necessarily a good store of value in the long run, while something that has high volatility does not mean that it can't be a good store of value in the long run."
It's easy to get scared of volatility. Investors, traders, and even true crypto enthusiasts let their feelings get in the way and exit the market at every little price spike. However, there is no one who has held Bitcoin for more than four years and is in the red. Literally nobody.
Here's what experts from Fidelity say:
"The U.S. dollar is not volatile but has also not been a good store of value in terms of purchasing power, while bitcoin is considered very volatile, but has been a much better store of value over the past ten and even five years."
"Volatility is a byproduct of price discovery, and there is no other way for price discovery to happen in a free market."
Even though Bitcoin is 13 years old, it is still in the process of determining the price. How much does it really cost? We won't know for years, even decades. "This process of individuals all coming to adopt bitcoin in different ways and timeframes necessarily must produce volatility," concludes Fidelity.
Fidelity: Bitcoin volatility is declining
The asset management company says the limited historical data currently available shows that volatility is declining in the long term.
It was the same with gold at one time, analysts say.
"As gold went through a major price discovery process in the '70s, which then resulted in amassing a larger base of investors, volatility naturally declined."
However, sums up Fidelity, bitcoin is still early up to this point. And while the company does not provide financial advice, it notes that now it is worth learning how to manage the volatility of the cryptocurrency and use it to your advantage.
