How Bitcoin Offers Less Volatility Than Current Financial Markets

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Inflation Stock Market

When asset prices are inflated, they eventually come crashing back down. Picture via watchingfrogsboil.

When you bring up the topic of Bitcoin in a regular conversation, one of the first things that people will want to talk about is the volatility of bitcoins. Many believe that bitcoins could never be used as money because the price is simply too volatile. Ignoring the fact that bitcoins are already being used as money by thousands of people across the world, it’s important to flip the argument back over to the current financial system. Sure, the price of a single bitcoin has been rather volatile since the currency was first invented five years ago, but the US Dollar and tax policy around retirement funds create larger amounts of volatility that affect financial markets around the world in an extremely negative manner. When you allow cheap money to flow into the economy and basically force people to store their retirement savings in the stock market, you’re going to end up creating some bubbles along the way.

The Bubble Economy

Many well-respected investors, such as Marc Faber and Jim Rogers, have been talking about price inflation in the US stock market for quite some time. The problem with how politicians view economic growth right now is that they look at the stock market instead of the number of people who have given up on finding a job. If the answer to every economic decline is to handout money to Wall Street so they can inflate the stock market, then we’re not really getting at the root of the problem. We’re simply replacing one bubble with a new bubble, just like how the tech bubble was replaced with the housing bubble. This bubble economy is extremely dangerous for the entire financial system because we’re basically building a house of cards to support the largest economy in the world. The moment one issue pops up and people realize that increased asset prices have nothing to do with reality, it all comes crashing down.

Inflation Losses or Gambling for Gains?

Another ways that the financial markets are propped up through inflation is the fact that the average person has to gamble in the stock market if they want to protect their savings. If you’re someone who does not want to risk your life savings in the stock market, then you’re basically penalized with inflation on a yearly basis. This pushes more people into the stock market than would be there with a stable or deflationary currency. There’s nothing wrong with saving money for a rainy day, and you should not be punished for trying to put together that simple rainy day fund. Nobody even really cares about savings accounts anymore because the interest rates paid on them are laughable at this point. It should also be mentioned that the current laws give the average person tax incentives to push even more money onto Wall Street through their 401k. This additional problem is not something that Bitcoin could solve on its own.

These Issues Go Away with Bitcoin

Since the bitcoin is a deflationary currency that is not handed out by a central authority, it becomes much more difficult to force the bubble economy on people all across the world. Banks are not receiving the newly minted bitcoins to place bets on Wall Street, and people who want to save money can simply hold bitcoins or lend bitcoins to others through a bank instead of gambling in the stock market. The currency is also deflationary, which means someone holding bitcoins would actually see an increase in the value of their bitcoin holdings. This is a much better alternative to losing more than 90% of the value of their savings over the course of 100 years. By replacing the bubble economy with a Bitcoin economy, we can bring some sanity back to the financial markets and make sure that people aren’t forced into gambling with their life savings. It will take some time for bitcoins to reach a stable price, but it will become much harder to prop up the stock market with inflated prices once that happens.

Update: Tuur Demeester just tweeted a picture that beautifully illustrates one of the main points being made in this post:

Stock Market Unemployment

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One Response

  1. Michael Hendricks

    Something else to consider is that the price of bitcoin is volitile in relation to the USD. So the question is does that volitility reflect a tendency of bitcoin or the USD.

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