Hey everybody, welcome back to TCB for another TCB short. For the short today, we're gonna be tackling the question, isn't volatility a problem for Bitcoin? So whenever talking about Bitcoin, one objection comes up almost immediately. Bitcoin is just too volatile, and it's a fair question. After all, if something's going to be money, shouldn't it be stable? So people see headlines about Bitcoin rising 30% or falling 50% to 70%, and they conclude that it could just never function as a serious monetary asset. But I'd just like to offer a different perspective on that idea. So Bitcoin's volatility is not evidence that it's failing. It's simply evidence that it's still monetizing. And if that's true, then volatility isn't the endgame. It's just simply part of the evolutionary process of becoming money. And when you talk about volatility, volatile compared to what? So when we say Bitcoin's volatile, we're usually comparing it to mature money systems like the United States dollar system. But that's a bit like comparing a startup company to a established Fortune 500 company. So one has spent decades or centuries establishing trust and building liquidity, and the other is still undergoing global price discovery. It's new. So a better comparison would be gold as it went through its rise as money, emerging national currencies, or kinda just other transformational technologies while markets were still determining their value. So the real question isn't, is Bitcoin volatile? It's, should we expect a brand-new global monetary asset to be volatile while the world is still deciding what it is worth? And so Bitcoin's naturally volatile. Why is it naturally volatile? And the answer to that question begins with Bitcoin supply. Bitcoin has one characteristic unlike any government-issued currency. Its supply is permanently fixed. There will only ever be twenty-one million Bitcoin by code. And in most markets, rising demand finds supply. Rising demand encourages more supply. So if you think about higher home prices encourage builders to construct more homes, higher oil prices encourage companies to drill more oil wells, higher stock prices encourage companies to issue additional shares of stock. But Bitcoin can't do any of these things. So when demand increases for Bitcoin, the supply does not respond. And since the pl- supply does not respond, the price has to. Scarcity makes price the balancing mechanism for Bitcoin. So just as an analogy, you can kind of think about this as the world's largest auction. So imagine the world's largest auction. The auction never ends, the items being sold are one of a kind, the auctioneer can never create more of them, and every day, millions of people from around the world walk into the room. Some think the items are incredibly valuable, others think they're wildly overpriced. Some wanna buy them, others wanna sell them, and everyone has a different opinion about what they're worth. So what would you expect from that auction? You would expect very large price swings, not because the items are changing, not because they're defective, but because the market is still discovering their value. And Bitcoin works much the same way. The supply never changes, so every new buyer, every institution, every country, every technological breakthrough that contributes new information to the market, it's all being digested. The auction is constantly searching for a fair price. So Bitcoin isn't volatile because the supply changes. It's volatile because the supply can't change. And the volatility we're observing may simply be the process of global price discovery And the process of monetization is the process of global price discovery. So history suggests that monetary assets aren't born fully formed. They become money over time. So gold wasn't instantly accepted across civilizations. The trust in it developed gradually, and the same is true for national currencies. Markets slowly discover which assets are best suited to preserve wealth based on their monetary properties, and Bitcoin is going through that same process. So in other words, the auction is still underway. The world is collectively trying to answer one question, what is the value of a perfectly scarce digital monetary asset? And that question won't be answered overnight. So I think about this in an analogy. There’s this physics idea of, dynamic stability or static and dynamic stability. So, what happens as this auction matures? This kind of brings us to that concept. There, the two kinds of stability, the first is static stability, and if you move an object, which way does that object move when it's disrupted? Does it tend to remove, like stay where it is, a neutral static stability? Does it tend to move back toward its position from where it was disrupted, which is positive static stability? Or does it tend to just kind of move further away from that point, which is negative static s- stability? So, um When we look at a system, it can appear stable if it's kind of manipulated. If you move something off of its point and you're constantly pushing it back toward its point, a system can appear stable when the movement is constrained or artificially controlled to kind of maintain that equilibrium, and I would kind of argue that's what our kind of monetary system is at present. And the second one is dynamic stability, and that's how an object kind of moves left to its own devices over time. And you can think about an airplane kind of flying through turbulence. An airplane doesn't eliminate every bump in the air. It kind of instead naturally absorbs the dis- disturbances and kind of just, like, moves, kind of naturally returns toward equilibrium over time. So the oscillations just become smaller over time, and it displays what we call positive dynamic stability. And the system is stable not because you intervene. It's left to its own devices. It recovers on its own. And I think Bitcoin is exhibiting something similar. As this auction grows larger, opinions begin to converge, markets deepen, liquidity improves, price discovery becomes more efficient, and the result isn't zero volatility. The result is gradually declining volatility. And why does the volatility decline? If this theory is correct, we should expect volatility to decrease as Bitcoin matures. And broadly speaking, that's what we've observed over every Bitcoin cycle. The volatility is dampening over time. And early in Bitcoin's history, just a small amount of money could move the market dramatically. But today, millions of people own Bitcoin, institution investors are participating, public companies hold it, spot ETFs have expanded access. Global liquidity in the asset is just much deeper And as markets become larger, it takes increasingly more capital to move prices by the same percentage. So the auction doesn't stop. It simply becomes more efficient over time. And if you gotta consider, um, if you change the question, if you look at like price stability versus purchasing power, they're kind of different things. So would you rather own something that's stable in price but gradually loses purchasing power, like the dollar, very stable, but loses power over t- or purchasing power over time, or something that's more volatile today but has historically increased purchasing period or purchasing power over longer periods? So they're different risks. So the US dollar is, as we talked about, remarkably stable over short periods, but over decades, inflation has reduced what each dollar can buy by over ninety-nine percent. So price stability and purchasing power stability aren't the same thing. And a good monetary asset honestly should be judged by both of those things over time. So I think during the transition here, you're gonna have two different jobs for two different assets. And this also helps answer another common question about Bitcoin is, does Bitcoin have to replace the dollar? And maybe that's the wrong way to think about it because money can perform... competing monies can perform different jobs. So checking accounts are designed for spending. You keep dollars there because you need them soon. You need to pay for groceries, you need to pay your rent, you need to pay utilities, you need to go on vacation. And savings have a different purpose. Savings exist to preserve your purchasing power over many years. So these are different objectives, and one possible future is that these different monetary assets kind of specialize during the transition. So dollars continue serving as excellent transactional money in the short term, and Bitcoin increasingly serves as that long-term savings asset. So checking accounts for spending, Bitcoin for saving. And then this goes to the next question of it's like, well, if that's the case, can Bitcoin ever become a medium of exchange? So, I think yes. If Bitcoin increasingly succeeds as a savings technology, it should eventually be possible for it to become everyday money as that volatility decreases over time. So economists often describe money as evolving through three stages. First is a store of value, second is a medium of exchange, and then finally as a unit of account where you price things in that money. And the sequence of that matters because people generally save in an asset before they're willing to spend it. If an asset reliably preserves purchasing power, confidence in that asset will grow, and if confidence grows and the volat- the volatility continues to decline, businesses become more comfortable accepting it, consumers become more comfortable spending it. And Gresham's Law, where economic actors hold on to good money and spend bad money, so in this case it would be hold on to your Bitcoin because it's increasing in purchasing power and spend your dollars because they're losing purchasing power, becomes less significant over time. And in that environment, Bitcoin's role as a medium of exchange could just expand naturally. And much later, if prices were commonly quoted in Bitcoin rather than converted from dollars, it could begin to serve as a unit of account as well. So whether that happens remains to be seen, but if Bitcoin's volatility continues to decline because of broader adoption, that path becomes increasingly plausible. So, The question isn't, is Bitcoin volatile? Because obviously we already know the answer to that. It absolutely is. The better question is, why is Bitcoin volatile? And if we, if the answer to that question is it's volatile due to its absolute scarcity, its global price discovery, growing adoption, and an auction that's still underway, then today's volatility isn't evidence against Bitcoin. It is simply evidence that the market is still discovering its value. So Every auction eventually reaches a point where buyers and sellers begin to agree. The larger the auction becomes, the more efficient the pricing tends to become. Bitcoin is probably following the same path. History suggests that monetary goods evolve. They f- they're first accumulated as stores of value. As confidence grows and volatility declines, they become increasingly useful as a means of exchange. And then only after widespread acceptance do they become the unit of account by which prices are measured. So whether Bitcoin ultimately follows this entire path might remain an open question, but if it does, today's volatility won't be remembered as proof that Bitcoin couldn't become money. It will simply be remembered as what globalization or global monetization looks like in its early stages. So when we ask the question, isn't volatility a problem for Bitcoin? The volatility is not a problem. It is a sign that monetization of Bitcoin is still underway. It is a sign that you haven't missed a critical phase of Bitcoin's growth, and it's a sign that we are still early. So in that case, volatility is a good thing. So I hope that helps y'all. Take care till next time. We'll see ya.