Bitcoin's Volatility Problem

“A stable price level and a high level of employment do not permit the total quantity of money to be kept constant.”

F.A. Hayek: Denationalisation of Money 

Fig. 1: Bitcoin commodity money (21 million)

Fig. 2: Adding Bitcoin credit money a.k.a. "currency" 

A money with an unstable purchasing power is a major cause of economic and social disorder. Any relevant rate of inflation or deflation distorts relative prices, capital allocation, and production. In benign cases, this may just impede economic progress while high inflation or deflation cause economic decline.

Fiat money is inflationary, as it enables govvernments to create currency out of thin air to fund their spending. This oversupply of money drives interest rates below the natural rate. This results in asset price bubbles which enrich the rich who own real assets and harms the poor who mostly hold the debased money or savings.

While more adoption as a store of value could reduce bitcoin's volatility somewhat, it is a false intuition that a fixed supply of money can ever show a stable value of money. It is also false that a fixed supply with consequential deflation is any less harmful than inflation. 

While a broader base of bitcoin hoarders may reduce the volatility of Bitcoin somewhat, it will never disappear by itself. A fixed supply can never meet a fluctuating demand at a stable price, it will unavoidably result in a fluctuating value, forever. Its volatility makes Bitcoin uncompetitive to more stable fiat currencies be it the USD, the Euro, or the Yuan where supply is managed by central banks, despite their significant inflation, policy, and sovereign risk.

There is only one policy which leads to a naturally stable purchasing power of a money: credit money creation in a free market. Centrally controlled or coordinated supply of money will be usurped by the regime, we cannot trust central banks.

The best regulator of the currency supply is the invisible hand, as for any good in a free market economy. Market prices aggregate and communicate information,  spontaneously adapting to demand. Historically, this natural regulator was the discount rate for commercial bills of exchange. In Bitcredit Protocol, it is the minting fee paid by customers who need currency to the competing Bitcoin credit mints who create it from customers' real ebills.

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