Bitcoin Price Volatility Is Relative – Bitcoin Magazine
This is an opinion editorial by Tim Niemeyer, co-host of the Lincolnland Bitcoin Meetup.
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Is bitcoin volatile? How to determine volatility? How can those with diamond hands so firmly say “no” while those stuck in the fiat mindset so emphatically say “yes”? Which one is correct? Is it just that both sides must agree to disagree, or can both of these apparent contradictions simultaneously be true?
To really answer these questions, we should first analyze Albert Einstein’s special theory of relativity…
The special theory of relativity
In Einstein’s attempt to better understand how the elapsed time of two clocks moved differently, we must look at one of his thought experiments: Imagine two individual observers, one sitting as a passenger on a train and the other watching from a platform Close by. The train passenger sees two lightning strikes at either end of the train, the first bolt from the front of the train and the second bolt from the rear. Meanwhile, the spectator on the nearby platform sees the two bolts hit both the front and rear of the train at the same time. The train passenger claims that the front strike occurred before the rear strike, while the bystander claims that the strikes occurred simultaneously.
Whose perception is accurate? Can it be both? Einstein believed that both interpretations are valid because they each have their own frame of reference.
This phenomenon led to Einstein’s theory of special relativity: different frames of reference necessitate different beliefs about the simultaneity of events. Put simply, having a different point of reference changes one’s perception. Admittedly, this is a gross oversimplification and a narrow view of a much broader concept, but this limited scope will suffice for how it relates to the disparities in perceptions of bitcoin’s volatility.
Bitcoin is not volatile
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In this analogy, let’s consider Bitcoiners as the passengers on the train. Because of the nature of technology, we travel at a steady speed set by mathematics and code. Inside this protocol we see that one bitcoin equals one bitcoin. We can verify the scarcity with a supply frame of 21 million. We understand how the lack of need for trusted third parties or central authorities ensures a trustless and permissionless peer-to-peer system. We realize that a whale has no more influence over the control of the ledger than a shrimp. We know that every two weeks the difficulty adjustment will continue to produce blocks approximately once every ten minutes; we grok the term “tick tock, next block.”
None of this speaks for volatility; quite the opposite, in fact. All this speaks for consistency; network consistency. It speaks to our grounded perception of a stable and secure system for value transfer over space and time. We passengers inside the train that is Bitcoin are better able to make financial decisions based on sound systemic fundamentals. This is one of the main reasons why Bitcoiners are able to have and maintain a low time preference; we are not as susceptible to distortions created by less volatile systems, leading to erratic economic behavior. Put differently, the predictability of the protocol maintains low-time preference.
Bitcoin is volatile
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From an outside perspective, it is clear that bitcoin is volatile. Their main frame of reference is not the network, but only the asset (specifically the BTC/USD exchange rate). When the supply of the dollar fluctuates wildly, when the cost of capital is consistently manipulated—not to mention with the competing, equally flawed currencies trying to escape hyperinflation—the viewer’s perception becomes distorted.
This is a real-world application of Wittgenstein’s ruler, a concept that states that “Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table, you might as well use the table to measure the ruler.”
Fiat watchers’ view of the bitcoin asset is obscured by their frame of reference, which is to say an unnecessarily convoluted one.
What’s worse is that because of this perceived volatility, onlookers are discouraged from taking a deeper look at the Bitcoin network. They find comfort in the familiar. They are unwilling to do the work to understand why their arbitrarily chosen system is wrong. As Jeff Booth points out, “Perhaps the biggest obstacle for people understanding Bitcoin is bringing the baggage of how the monetary system works today and in the past, versus how it will work in the future.”
All the misinformation inside the fiat system is pushing its constituents away from connecting the dots…while simultaneously sitting on a sporadic and spastic merry-go-round. They have either knowingly or otherwise accepted that the fate of their money (in its form as a store of value, medium of exchange and unit of account) will potentially change about every four years of election cycles. They have been conditioned to believe that there must be a small group of elites who “know best” how to manipulate the growth of an economy (while ignoring the inherent incentives of elites). They overlook the fact that the currency they are forced to use has lost 99% of its value over its lifetime.
This last point pushes those inside the fiat system to adopt a high time preference, knowing that the value of their time and effort will be devalued over time. This further distorts their frame of reference, and thus their ability to make sound financial decisions; choosing between a volatile, alternative asset that requires a low time preference and a lot of effort to understand versus a new gadget that provides endless dopamine dumps…well, I can see how it’s an easy choice for them.
The theory of monetary relativity
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All of this can be simply stated as: Bitcoiners determine volatility based on the reference to the network and protocol, while fiateers derive volatility from the reference to the bitcoin asset.
As says Gigi, “Bitcoin is not volatile. People are.” Therefore, we must continue to reframe the conversation from the resource to the network and the protocol. The asset will continue to show volatility (to the upside in the long term), which is not due to the Bitcoin network or protocol, but due to the volatility of human nature.
This is a guest post by Tim Niemeyer. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
