Why Ignore Bitcoin’s Volatility?
Bitcoin’s price has gone down by 44.16% within 2 months (Coinbase, 2021). Why did that happen?
When more people learned that running cryptocurrency networks consume a massive amount of electricity, investors lost confidence in Bitcoin’s long-term sustainability.
In addition, when Elon Musk made a few tweets on how Bitcoin is harmful to our planet, Bitcoin’s price crashed.
Despite all the pessimism on Bitcoin, how is Bitcoin still priced at $32,000 USD? That’s still quite high compare to where it was in January 2021 – $20,000 USD.
If you bought some Bitcoin in January, you would’ve still made a profit of $12,000 USD per Bitcoin.
Bitcoin’s price climbed to $62,000 USD and decreased shortly back to $33,000 USD in 45 days, this process is what I call “short-term volatility”. More often than not, short term volatility is a temporary effect.
As a Bitcoin investor myself, I am not worried about Bitcoin’s short-term volatility. Let me tell you why…
To ignore Bitcoin’s volatility, you have to understand and believe in the long-term potential of Bitcoin.
So, what is Bitcoin’s long-term potential?
The reason why Bitcoin is still priced at $32,000 USD not $10,000 USD or $5,000 USD, is that investors believe that the current setback is relatively small to its potential.
In the eye of Bitcoin advocates, Bitcoin can potentially become one of the most prominent used payment methods in the future.
Imagine if Bitcoin actually becomes one of the commonly used payment methods.
What would the price of Bitcoin have to be for every person to get a fair slice of a pie?
(Statistics: Bitcoin’s supply is capped at 21 million and the world population is 7.6 billion)
On average, how much Bitcoin will each person have?
21 million Bitcoins divided by 7.6 billion people is 0.002763 Bitcoins per person. On average, each person will have 0.002763 Bitcoins in their wallet.
If we multiply Bitcoin’s price by the average number of Bitcoins per person, we can approximate on the purchasing power per person (measured using Bitcoins).
Let’s take a wild hypothesis:
Assume Bitcoin’s price is $10 million USD, each person will only have $27,000 USD worth of Bitcoins to spend.
$27,000 USD per person is definitely not enough for anyone to spend, which means that some investors believe that Bitcoins price may exceed $10 million USD.
How can Bitcoin be priced at >$10m USD?
For the price to reach the millions, there needs to be a surplus of demand and high adoption rate.
If you believe that Bitcoin’s price will reach into the millions or billions, the recent decrease of 40% in price doesn’t matter in the big picture. Volatility is simply short-term changes.
“When you’re investing in any asset class, the power of ignoring volatility is key to remain a calm state of mind.” – Leinvests
You save yourself from emotional pains such as blaming yourself when you bought Bitcoin at $60,000 and it drops to $30,000 after a month.
“Instead of letting volatility play with your mind, focus on an investment’s long-term potential and forget about the daily profit and losses.” – Leinvests
(This applies across all asset classes, not just cryptocurrency. But this effect is exaggerated through cryptocurrency’s high volatility).
“WHY” is it worth investing in Bitcoin for the long run?
Where does Bitcoin’s value derive from?
Bitcoin’s value is derived from the value we – investors, believers, traders, or governments – give it.
Comparing USD with Bitcoin, USD’s value is derived from the Federal Reserve as it provides the confidence for citizens to use and save it. Without the Federal Reserve, the USD is simply a colorful paper.
Bitcoin is different as there is no one behind controlling or manipulating the supply – which is what attracts investors onboard.
Bitcoin’s value is specifically derived from investors long-term confidence, how many people are using it to purchase product and services, and how often it’s being used in the marketplace.
What is Bitcoin’s role in our future monetary system?
As Bitcoin is a decentralized matter – if you don’t understand what this means, I wrote a blogpost for entry learnings (Bitcoin 101) – investors envision that Bitcoin will play a key role in our future payment system.
Investors don’t think Bitcoin will “replace” fiat currency, or Central Bank Digital Currencies (CBDC), ex: digital Yuan.
But Bitcoin will be a commonly used alternative method of payment that consumers can choose to use.
What is the problem in the current monetary system?
Due to Covid-19, quantitative easing (QE) has reached historical highs – the process of central banks printing money.
When there is an increase in money supply, inflation rate increases.
As we all know, recession comes and goes, but inflation rate doesn’t. The cost of a loaf of bread today is definitely way higher than what it was 30 years ago.
How can Bitcoin possibly solve this problem?
With the presence of Bitcoin, where money is decentralized and not controlled by central banks, inflation rate will be under control, and it restores the confidence of “money.”
When paper-money becomes obsolete in value, investors will be looking for other asset classes for “store of value”, which Bitcoin would be one of their major considerations.
Bitcoin is liquid, transferrable, a medium of exchange, and has store of value. Almost equivalent to the properties of paper-money.
It is only lacking “stableness” and “wide-adoption”.
So, what do these Bitcoin investors believe in?
Bitcoin advocates believe that one day, cash will be worthless due to the climbing rates of inflation and central banks will have to implement another source of digital currency.
At the time where digital currency is the norm, early adopters of Bitcoin believe that it is inevitable that consumers will have to adopt the use of Bitcoin.
But until then, Bitcoin will stay as a speculation asset and not a functional currency.
My take on where Bitcoin is going
Personally, I’ve allocated small amounts of my portfolio to cryptocurrencies, Bitcoin & Ethereum.
I share the common beliefs of other Bitcoin investors out there. In 20 or 30 years, cash is most likely going to become obsolete in value.
China has already been making big moves in establishing its Central Bank Digital Currency (CBDC) Digital Yuan. It is evident that the 2nd largest economy in the world is aware of this problem (CNBC,2021).
Moreover, El Salvador has made Bitcoin one of its national currencies and while countries like Argentina, and Brazil are discussing the logistics of it (Forbes, 2021).
Here’s an optional resource if you interested to understand why El Salvador accepted Bitcoin as a legal tender, read more here.
Is your vision aligned with mine?
If not, tell me your reasons down in the comments, would love to hear more about others opinion. You can also DM me on Instagram (@Leinvests_)
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