Will price volatility be the death of bitcoin?

Over the past year the price of a single bitcoin raced from around $1,000 (CHF996) to $20,000; it now trades for around $7,000 Keystone

The dramatic price volatility of bitcoin could be solved by accepting the cryptocurrency into the established financial system. That’s the opinion of Jon Matonis, a founder of the Bitcoin Foundation. But it’s also a view that flies in the face of bitcoin critics. 

Over the past year the price of a single bitcoin raced from around $1,000 (CHF996) to $20,000; it now trades for around $7,000. On April 12, the price suddenly shot up to $8,000 in the space of an hour, probably due to the activities of a large trader. 

At present a relatively small number of bitcoin hoarders, known as ‘whales’, or larger-scale traders can send prices rocketing in one direction or another. But were governments to add bitcoin to their reserve currencies or if mainstream exchanges were to allow bitcoin to trade alongside dollars, euros and francs, the story would be different, Matonis argues. 

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Jon Matonis, founding director of the Bitcoin Foundation Getty/Bloomsberg

“Volatility results from inadequate liquidity on exchanges. The exchange infrastructure needs to be more robust so that when someone sells €10 million (CHF12 million) worth of bitcoin that shouldn’t move the market,” he told swissinfo.ch on the fringes of a crypto conference in Zurich. 

“The market is so thin right now that when established players move in with orders of that magnitude you see this volatility.” 

Huge spikes and troughs of inflation and deflation make bitcoin an unreliable form of payment. If you can’t tell how much your bitcoin will be worth from one month to the next, how can you rely on it as a form of income or use it to buy goods and services? 

The arguments against

Bitcoin detractors including Credit Suisse Chief Executive Officer Tidjane Thiam, UBS Chairman Axel Weber and Adriano B Lucatelli, founder of Swiss fintech firm Descartes and lecturer at the University of Zurich. They argue that bitcoin is a fad with no intrinsic value, driven by the irrational enthusiasm of amateur investors and prey to speculators. 

From being an early enthusiast of bitcoin as a decentralised private currency outside the influence of central banks and governments, Lucatelli has lost his zeal after witnessing its volatility. Speaking at the Crypto Mountain RocksExternal link conference in Davos last month, Lucatelli compared bitcoin to the dotcom bubble hype. 

Bitcoin only has a value so long as investors believe they can convert their speculation back into normal currencies. “If people start to fear they can’t switch back, it’s dead,” he said. “All the beliefs that people have about bitcoin are wrong. Eventually everyone will realise that. When everyone is running out of the door you will have a squeeze and a lot of people licking their wounds.” 

Matonis disagrees with the doomsday predictions despite recognising that the decentralised bitcoin currency faces an uphill task in being accepted by the mainstream financial sector. 

“When bitcoin starts to be used as a reserve asset to back the ‘funny money’ [fiat] that central banks are printing it takes game to another level. Then you will have true competition between crypto and central bank money and the best will prevail. But the authorities fail to look at it this way because they know that it threatens central bank money,” he said. 

Stable coin projects

Matonis rejects the “babbling nonsense” of central banks producing digital cash – in other words, taking bitcoin’s technology whilst centralising control. This would “strip out the innovation” of a fixed limited supply of coins plus decentralisation that would spare people from central bank currency manipulation, he said. 

Global efforts are already underway to produce a stable cryptocurrency, mainly be pegging the tokens to underlying assets. One notable example is Tether, that claims to be backed by US dollars, but its claims to have a dollar in reserve for each token it mints are reportedly under investigation by the US authorities. 

In Switzerland, the SwissRealCoin and Tiberius Coin projects plan to back their tokens with real estate and baskets of metals respectively. Another Swiss start-up, Forctis, also has designs on producing a stable coin.