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Volatility is the result of several factors and liquidity is only one of them. For example, the oil market is very large and liquid, yet still fairly volatile.

by matco11 12y ago

Volatility is the result of several factors and liquidity is only one of them. For example, the oil market is very large and liquid, yet still fairly volatile. Volatility is obviously undesirable for anything that is intended to function as a reserve of value. This is why, for example, there is no discussion of oil being a reserve of value, or a currency. As for the example above, greater liquidity in the Bitcoin market will not automatically make it less volatile, or lower volatility enough. Bitcoin's volatility is structural (it goes well beyond the issues with the exchanges). Effective currencies have several mechanisms designed to protect their value and minimize volatility: Bitcoin lacks them and hence it's structurally fragile and volatile. So, Bitcoin cannot represent a reserve of value. Stable preservation of value is a key characteristic of a currency (this is one of the reasons inflation is monitored by central banks, for example), hence, if Bitcoin cannot work as a reserve of value, it cannot work as a currency. Perhaps, other crypto currencies, in the future, may be structured with more robust mechanisms and work better.

dpweb 12y ago
>> Effective currencies have several mechanisms designed to protect their value and minimize volatility Yes, government manipulation. I think many of the btc enthusiasts miss the point. You can't have a huge important currency without guarantees. Goverments have armies and taxes and so provide these guarantees. No world government/control of btc = no btc becoming the "global currency".
- ingler 12y ago
  To be fair, Bitcoin is the first form of international money to come into existence without government decree. These are still uncharted waters.
markburns 12y ago
I agree that because of the lack of controls it will be more volatile than other currencies, but I think volatility will at least reduce to something like gold once the majority is mined. It's volatility is partly due to the difficulty increase and reward halving part of the protocol. I.e. the part designed to reward early adopters. Which was necessary to bootstrap it. It's a speculative game for the first maybe decade or two. As the bitcoins gradually leave the early adopters as they cave in to whatever price is worth it for them there are bubble cycles. Once there is more general adoption, it will settle down though. As people gradually start to think less in e.g. Euros and consider not changing directly into local currency, but just to hold some for their day-to-day transactions because they are particularly useful in certain circumstances. Once it's passed a tipping point they will be more useful in more and more situations, to the point that it's easier to just have your smart phone and cursing cash or credit card only places. I'm sure there will be retro hipster bars that take cash only in the future. Anyway, as for the remaining volatility, it may just be that bitcoins serve as gold and another somehow regulated cryptocurrency serves as ordinary money.

by matco11 12y ago

dpweb 12y ago

>> Effective currencies have several mechanisms designed to protect their value and minimize volatility Yes, government manipulation. I think many of the btc enthusiasts miss the point. You can't have a huge important currency without guarantees. Goverments have armies and taxes and so provide these guarantees. No world government/control of btc = no btc becoming the "global currency".

ingler 12y ago
To be fair, Bitcoin is the first form of international money to come into existence without government decree. These are still uncharted waters.

markburns 12y ago

I agree that because of the lack of controls it will be more volatile than other currencies, but I think volatility will at least reduce to something like gold once the majority is mined. It's volatility is partly due to the difficulty increase and reward halving part of the protocol. I.e. the part designed to reward early adopters. Which was necessary to bootstrap it. It's a speculative game for the first maybe decade or two. As the bitcoins gradually leave the early adopters as they cave in to whatever price is worth it for them there are bubble cycles. Once there is more general adoption, it will settle down though. As people gradually start to think less in e.g. Euros and consider not changing directly into local currency, but just to hold some for their day-to-day transactions because they are particularly useful in certain circumstances. Once it's passed a tipping point they will be more useful in more and more situations, to the point that it's easier to just have your smart phone and cursing cash or credit card only places. I'm sure there will be retro hipster bars that take cash only in the future. Anyway, as for the remaining volatility, it may just be that bitcoins serve as gold and another somehow regulated cryptocurrency serves as ordinary money.