Fidelity will take you along on the journey through volatility. Bitcoin critics wield one of the asset’s main characteristics as an unsolvable failure, but, is it? According to Fidelity, “bitcoin is fundamentally volatile.” That doesn’t deter it from fulfilling “its ultimate investment objective of preserving wealth over long time periods.”
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The company said all that in Fidelity ‘s latest edition of “THe Research Round-Up.” In their longer explanation, they use oil and gold as examples to explain the whole volatility process. We’re in the summarizing business, though. NewsBTC will summarise their article, highlight the key points and comment briefly on them.
Fidelity Explains Bitcoin’s Fixed Supply
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“Bitcoin is unique in that it is a good whose supply is completely inelastic to changes in price. In other words, supply does not (and cannot) change in response to price.”
There will only ever be 21 million bitcoin and that’s that. With other goods, there’s a cycle. “Going back to economic principles, we know that when demand increases for a good, in the short-term the price will rise. However, a higher price encourages suppliers to produce less. More supply will then bring down the price.” This doesn’t happen in bitcoin.
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“With bitcoin, supply cannot change regardless of what price does. Therefore, any change in demand, short-term as well as long-term, will have to be reflected by changes in price.”
It’s only logical. Supply and demand laws can only have an effect on the price. “There is no change in supply to dampen the effect of price moves, even over the longer-term.” Mix that with an ever-decreasing supply of new coins, due to the halvings, and you have a perfect recipe for what bitcoiners call “number go up technology.”
Parker Lewis’s quote, Fidelity sums up the phenomena:
“Bitcoin is valuable because it has a fixed supply and it is also volatile for the same reason.”
Both of these characteristics are included in the package.
Source: BTC/USD on TradingView.com| Source: BTC/USD on TradingView.com
Bitcoin as a Store of Value
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“Something that has low volatility is not necessarily a good store of value in the long run, while something that has high volatility does not mean that it can’t be a good store of value in the long run.”
It’s easy to get scared by volatility. Investors, traders and believers can allow their emotions to get in the way of the market and make it a point to exit with each bump. However, there’s no one that has holded bitcoin for more than four years and is in the red. Literally, no one.
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Let’s get an obvious example from Fidelity, “The U.S. dollar is not volatile but has also not been a good store of value in terms of purchasing power, while bitcoin is considered very volatile, but has been a much better store of value over the past ten and even five years.”
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“Volatility is a byproduct of price discovery, and there is no other way for price discovery to happen in a free market.”
Even though bitcoin is 13 years old, it’s still going through price discovery. Is bitcoin actually worth what it seems? We won’t know for years, even decades. “This process of individuals all coming to adopt bitcoin in different ways and timeframes necessarily must produce volatility,” completes Fidelity.
Fidelity Thinks Bitcoin’s Volatility Is Decreasing
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“The limited historical evidence we do have so far appears to be showing volatility declining over the long-term.”
Bitcoin volatility decreasing| Source: Fidelity
This graph shows clearly that volatility is gradually decreasing. This is only natural. Fidelity explains, “as gold went through a major price discovery process in the 70’s, which then resulted in amassing a larger base of investors, volatility naturally declined.” We’re still early, though. While this is not financial advice for you, at least it will help you learn to ride volatility and make the most of it.
Charts by TradingView and Fidelity| Charts by TradingView and Fidelity