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Volatility Is Good

Before I read this insightful bitcoin.com forum post by Wences Casares, I thought that Bitcoin’s extreme price volatility was an inhibitor to mainstream adoption.

Of all the ways in which Bitcoin could fail the one that worries me most, because I think it has the highest probability of all the bad things that could happen, is a price panic that drives the price to zero, or $15, from which it may be very hard for Bitcoin to recover the public’s trust.

Right now most of the money that is invested in Bitcoin is money people can afford to loose and that makes it safe money. So when Bitcoin goes from $1,200 to $200 there is not a vicious cycle of people who need to sell, because they cannot afford to loose more money, that drives the price to zero.

It is hard to estimate how many people own bitcoins, but it may be somewhere between 13 and 15 million people right now. If Bitcoin is successful we will see hundreds of millions of people own Bitcoin and, eventually, billions. The only way we can get to billions of people owning Bitcoin is by the price going up by several orders of magnitude, let’s say $ 1 million (but this is highly speculative and risky). So, if I am right, and Bitcoin has to go from $390 to $1,000,000 the best way for it to get there without crashing irreversibly is with as much volatility as possible. If bitcoin went up a couple percentage points every week and everybody began to think about it as a “sure” thing, investing money that was destined to pay for kids colleges or for retirement, that is a disaster waiting to happen price wise. Because when Bitcoin corrects those people have to sell because they cannot take more losses, potentially creating a vicious circle which is hard to reverse.

Ironically, we have to thank Bitcoin’s volatility for people not investing money they cannot afford to loose. As long as the Bitcoin price remains highly volatile and perceived as risky, we are OK. Begin to worry when it is perceived as a sure thing that everybody should own a lot of. – Wences Casares

Wences is a staunch Bitcoin advocate and the star character in the book “Digital Gold“. When he speaks, I listen closely.

If you want to help make the world a better place for literally billions of “unbanked” people and you have some money you can afford to lose, then screw blowing that money on casinos and/or lottery tickets. Follow these instructions:

  • Download a desktop computer wallet program (I use the Electrum wallet) and  create an encrypted wallet.
  • Open an account on a bitcoin exchange (I use Coinbase.com)
  • Exchange your “lose-able” fiat currency for bitcoins.
  • When your bitcoins get deposited in your exchange’s online “custodial” wallet, transfer it off of the web and into your desktop wallet.
  • If you’re really paranoid about having your Bitcoins stolen, grok how to move your keys out of your desktop wallet and into a hardware wallet or paper wallet – and then do so.

If you don’t physically possess your private bitcoin keys, you really don’t own any bitcoins. You have to trust whoever has possession of those keys to keep them safe – like you have to trust a bank to keep your fiat money safe. And as we all know too well from the 2008 debacle, third party keepers of “other people’s money” like banks are not to be trusted if there is a viable alternative. Bitcoin is one such alternative, but you have to spend the time to educate yourself and take personal responsibility for your financial well being.



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