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The Bank of Canada has released a research paper On the Value of Virtual Currencies. The report specifically emphasises that mainstream usage will stabilise bitcoin’s price. But is it truly a positive sign?

The BoC’s paper attempts to analyse the exchange rate of virtual currencies like bitcoin and the factors that determine its market value. The concluding remarks state that, based on the investigation of the bank’s cryptocurrency experts, “more widespread use of virtual currencies by merchants and consumers lowers the impact of speculative behaviour and therefore stabilizes the exchange rate.”

The observation of the Bank of Canada seems to be true. As the mainstream adoption of bitcoin was rapidly growing over the past few years, its price volatility significantly decreased, from 13.8% BTC/USD volatility rate in mid-2011 to 2.2% in August 2016.

bitcoin volatility graph

However, the fact is that the BoC research misinterprets and misvalues the importance of price volatility for the growth of bitcoin.

Bitcoin has been the world’s best performing currency for four straight years. As the demand for the digital currency quickly surged within large economic entities such as the US, Europe and China, the value of bitcoin grew exponentially, surpassing presumptions and predictions of financial experts.

While price stability is an important characteristic of a currency or any asset of tradeable value, volatility is also vital in the sense that it serves as a direct demonstration of the asset’s growth in market value. In simpler terms, bitcoin cannot benefit from increased adoption without volatility.

For instance, let’s presume that, based on the growth rate of bitcoin over the past few years, the digital currency will continue to increase exponentially both in value and in the number of users, triggering a major surge in demand. This fast-paced growth will inevitably cause serious price volatility, as it will substantially increase in price and value as it scales to serve a wider user base.

In this particular event, the volatility of bitcoin is actually beneficial for investors and common users alike because it allows the currency to increase in market value. Thus, price stability, as the Bank of Canada suggests, is not the most important quality of bitcoin just yet. Considering that the world’s first cryptocurrency is still in its infant stage, users and investors may potentially see higher volatility rates in the future as bitcoin surges in price.

So, the bottom line is that, although the BoC’s research paper accurately describes the connection between the decreasing volatility rate and increasing mainstream adoption of bitcoin, its price volatility and the adoption rate will always go hand-in-hand.

Joseph Young