Since the great bitcoin rally in late 203 that brought the cryptocurrency to the limelight, things have been relatively quiet for the digital currency. In fact, in January of this year, bitcoin fell to a two-year low of about $214, down 71.14% from its all-time high hit in November 2013, according to CoinDesk BPI exchange.
However, since the two-year low in January, the digital currency has risen by 191% to around 623.24. For one, such a large swing in price shows how volatile the price of bitcoin is. Wall Street analysts believe that equities are the riskiest class of assets. But we can all agree that bitcoin is riskier.
In the real scheme of things, bitcoin will struggle to gain the dominance it promises in the financial markets if it continues to be so volatile. It simply just needs to be a whole lot more stable than this. During the great recession, the “most volatile” equites didn’t even display the level of volatility that bitcoin is exhibiting. For instance, from November 27, 2007, when markets analytics firm Ycharts marks as the beginning of the recession, the SP 500 fell only 50% to the lowest point that the recession saw.
One thing that keeps things in check in the equities market is the fact that there are a lot of strings attached to the market that prevents the market from over reacting to every bit of event. Some of these include the Federal Reserve, interest from powerful folks around the work – the wealthy – trading volume, the strength off the economy, to name just a few.
For bitcoin to be even remotely as stable as stocks, player in this field need to work more aggressively to get the digital currency attached to a number of heavy strings.
To that end, here are a few things that could make the price of bitcoin a bit more stable.
Bitcoin becoming an underlying asset for certain financial instruments
If bitcoin becomes more of an investment product than just a digital currency, the price of bitcoin is surely to stabilize. You probably know that it isn’t just the brownie points that people win from wearing gold that makes the precious metal so valuable and its price stable. It’s the huge investment interest that it attracts. So beyond just being a digital currency, bitcoin needs to have a respectable interest from investors to stabilize prices. If nothing else, it will offer a much-needed trading volume stability, which will end up.
However, with a number of high-profile bitcoin hacks and theft, it becomes difficult for folks who are interested in long-term investment to put their money in bitcoin. However, the much-expected bitcoin Exchange Traded Funds (ETFs) will go some way to make long-term investment easy, since investors will only be investing in funds that track the performance of bitcoin exchanges. They won’t be so much exposed to the risk theft.
As an additional benefit, becoming an underlying asset for EFTs or any other financial instrument, will boost bitcoin’s security profile. That is because, since more of the world’s wealthy people would be behind it, bigger efforts will be made to secure the cryptocurrency.
Once bitcoin becomes even more secure, even heavier strings (more financial products) will become attached to it, hence making it more stable. Bitcoin deal will then be so complex that you’ll see unthinkable processes of buying bitcoin, getting a personal loan against that bitcoin and then improve credit rating using a personal loan.
Becoming Widely Accepted As Safe Haven
As stated earlier, gold is thriving mostly because of its investment appeal. A big part of that appeal is that it is seen as “safe haven” asset class. This makes sense for bitcoin since it is viewed like a commodity, which many times, move counter to the direction of fiat currencies.
First, though, it needs to become an underlying asset for an instrument like ETF to achieve the much-needed price stability. If it does, the next decade could be a big one for bitcoin. For one, that is because gold has outperformed stocks for the last one and half decades. Second, analysts are predicting that the performance of equities and bonds will drop significantly over the next two decades.