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Price Volatility No Match for Bitcoin’s Potential

By: Contributor - Mar 4, 2015, 8:48 am
Bitcoin can reach places where traditional payment systems are unavailable or blocked
Bitcoin can reach places where traditional payment systems are unavailable or blocked. (Flickr)

EnglishBitcoin and its underlying blockchain technology have been out on the market for six years. Given all the potential, it’s still early days.

No one knows for sure how successful bitcoin will be: it could be supplanted by superior technology, remain limited to certain groups and niches, become the world’s financial clearing system, or descend to the masses as an everyday currency. Bitcoin is so versatile it could find a place in many sectors beyond money and finance.

This uncertainty leads to diverging opinions about how much we’re willing to spend for every unit. Bitcoin’s volatile price is the result of such varied subjective valuations, and beyond disagreement, the participants themselves change their minds all the time. Furthermore, the bitcoin market is still small enough to where a transaction of a few million US dollars can directly impact its price.

All these variables usually produce a daily price volatility of about 3.8 percent. Is that a lot? Yes, it’s higher than for gold and most fiat currencies. Will it remain high forever? We don’t know, but the mounting capitalization and the test of time that inherently reduces the uncertainty tied to new things could well result in a more stable price in the future.

Now, does this volatility affect every bitcoiner? No. While you can use bitcoin for saving, investment, or arbitrage opportunities, a lot of adopters use it mainly as a means of transferring value, and in this case the price doesn’t matter so much.

For those seeking a better remittance system or a cheaper, freer, and more inclusive solution over bank transfers, bitcoin is a revolutionary technology regardless whether its price tag is US$1 or $1,000.

Imagine a man working in Europe who must send money every month to his family in Argentina. His options are basically limited to a remittance company, or having a bank account in both countries. These traditional mechanisms are faced with the lower, official exchange rate imposed by the Argentinean government, which results in the family taking a 30 percent cut when the euros are converted to pesos. And both the remittance company and the bank charge non-negligible transfer rates.

Let’s contrast this with a completely legal bitcoin solution. The man in Europe buys the bitcoins (in cash or through a bank account linked to a broker or exchange) and sends them to his relatives in Argentina, who in turn sell them in the local bitcoin market.

The Argentinean Central Bank’s confiscatory and fictional conversion rate is no longer a problem thanks to bitcoin, whose currency unit behaves like a commodity and thus is valued at around the same price everywhere in the world. Brokers and exchanges still take their cut, but it’s much less expensive.

As we can see, it is of little importance how much a bitcoin is worth when you use it to transfer value. The price only determines how many bitcoins will be transferred, and the volatility of a few hours between buying and selling usually poses no problem. Even then, some companies already allow you to “freeze” the value of a bitcoin transfer, and they assume the risk for you.

Argentina is not the only concern for money transfer. There are many countries with commercial embargos (Crimea), or with limited availability of currency for flight tickets (Venezuela), or even legal business sectors that no payment processor wants to touch (the encrypted cloud storage service Mega refused by PayPal).

In these days of barriers and financial repression, bitcoin is not only a cheaper and more privacy-oriented alternative, sometimes its decentralization and lack of intermediaries are the only way out.

Bitcoin’s price matters — but the freedom that comes with it matters even more.

Translated by Daniel Duarte. Edited by Fergus Hodgson.