Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last

Bitcoin coins at BitcoinCommodities in Berlin on Nov. 28 Photograph by Jens Kalaene/dpa via AP Photo

From recent highs of $1,240, Bitcoin plunged as much as 30 percent, to $870, early on Dec. 5, after China’s central bank announced regulations forbidding financial institutions from handling Bitcoin transactions.

The U.S. Federal Reserve has no plans to regulate Bitcoin. But former Federal Reserve Chairman Alan Greenspan chimed in, calling Bitcoin a bubble in an interview yesterday on Bloomberg TV.

By now, wild moves in the price of Bitcoin are to be expected. And unless this emerging asset class becomes a more stable reservoir or wealth, Bitcoin will continue to be viewed with suspicion among everyone but the most daring of speculators.

China’s new regulations come shortly after Bitcoin reached what was hailed as an important milestone: parity, of sorts, with gold. Its price in U.S. dollars on Tokyo-based Mt. Gox, the largest Bitcoin exchange, briefly touched the $1,242 price of 1 troy ounce of gold around 12:30 a.m. on Friday. Bitcoin quickly fell away, but the two assets continued to dance closely to each other until today.

If the moment seemed to give Bitcoin any luster of maturity, it was illusory.

In total value of outstanding units (and don’t call it market cap), Bitcoin, cumulatively valued at $13 billion, is still dwarfed by the globe’s $6.8 trillion worth of mined gold, according to estimates by precious metals consultancy GFMS. Those extant Bitcoins are currently worth about 10.5 million troy ounces of gold, putting it between the gold reserves of Venezuela (11.8 million troy ounces) and the U.K. (9.98 million troy ounces).

Moreover, every exciting runup in price, or panicked selloff, is just another setback for Bitcoin’s volatility, as Joshua Brustein wrote on Monday. Two years ago, Timothy Lee noted the irony that while Bitcoin goes to great lengths to avoid the volatility of supply-side inflation, algorithmically capping the supply at 21 million coins, it’s been undermined by the volatility of demand. It may be useful as a pass-through between other currencies (some Chinese sidestep currency controls via Bitcoin), as Lee suggests, but holding the digital currency for any period of time is still more of a gamble than a convenience.

Looking at a 90-day rolling estimate of Bitcoin’s volatility, it has rarely approached the stability of gold for more than a moment, much less that of the U.S. dollar. Bitcoin’s value has jumped and crashed more than 40 percent in a single day. For anyone hoping to use the cryptocurrency as more than a conversation topic, the question remains: Will Bitcoin get boring, or stable, before it gets cracked or abandoned.

Meanwhile, now that many market-watchers have begun denominating charts in millibitcoins (currently at $1.06), the next arbitrary milestone might be parity with BlackBerry (BBRY, $6.14).

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