Why Bitcoin's Stability In Volatile Markets Makes It A 'Must Own' For Long-Term Investors

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For a currency marked by volatility, Bitcoin has been remarkably stable against the U.S. Dollar over the last couple of months, essentially trading in a $320-$420 range. For those attracted to the virtual currency as a trading instrument due to massive volatility in the past that is no doubt a disappointment, but to those who are more interested in the blockchain as a game-changing payment system and the currency as a potential store of value in an inflationary environment, it is welcome news.

They would argue that this relative stability is a sign of maturity in the market, while those who look for the negative in anything to do with crypto-currencies would no doubt claim it is a sign of a growing indifference. To some extent, both may be right, but either way it is a good thing for Bitcoin’s long term prospects.

Of course, a trading range of 30 percent or so still represents enough volatility to keep even the most ardent currency trader occupied, but after establishing those levels of support and resistance BTC/USD has begun to narrow its own range and has spent the last week or so hovering around the mid-point of $370.

The above chart, from Bitcoincharts.com, also shows volume bars at the bottom. As you can see, volume has been steady, low and declining for several weeks. Some of this may be down to the Thanksgiving holiday in the U.S., but it is more than a one-day phenomenon. What makes the lack of movement and declining volume of trades even more remarkable is that it has come at a time when commodity markets, most notably oil, have been under pressure. In many ways, Bitcoin’s known and finite supply makes it more like a commodity than a currency, but as other commodities have lost ground to the Dollar, BTC has stabilized.

Could it be, then, that as money has shifted away from inflated, risky assets such as oil and gold and run away from fiat currencies that are being deliberately devalued by central banks around the world, Bitcoin is seen by some as somewhat of a safe haven? That would certainly fit with the stability against the traditional safe haven, the U.S. Dollar.

That could be the case if not for one thing; that low volume. That would suggest that far from flocking to Bitcoin as a safe haven, global cash is essentially ignoring it. If that is the case then the next logical conclusion is that this $370 level represents the real value of BTC in USD terms at this point in its evolution. As anybody with a basic understanding of economics can tell you the price of something is a reflection of supply and demand and price stability comes when they are in balance. Given the evidence, the most likely scenario is that that is the case with Bitcoin right now.

The jump up in price to the giddy highs of over $1100 at the end of last year brought a lot of publicity and increased awareness to the Bitcoin market. This attracted more miners and effectively increased the rate of supply, so a drop in price was somewhat inevitable. Mining Bitcoin, though, gets more difficult, and therefore more costly, by design with the passage of time. The rate of supply is thus inexorably reduced, but the overall supply continues to increase. This price stability suggests that the overall supply is now at a point that is enough to satisfy demand but there is not an excess of coins in circulation.

Given that, the continuing decline in the rate of supply and a tendency for demand to increase as stability takes hold, there is, in the long term, only one way for BTC/USD to move...up.

All of this, of course, assumes that education and awareness continues and more and more people understand the benefit of making and receiving payments through the blockchain at minimal cost. It also assumes that there will be no en masse speculative selling by traders as maturity and the accompanying derivatives make shorting easier. If those two assumptions are correct we are left with a situation where owning at least some Bitcoin makes sense for every long term investor, not just believers and speculators.

When asked over the holiday why that is the case, I put it this way. If you have $375 that you want to leave, in cash, for your great-grandchildren, you have a choice. You could lock the Dollars away somewhere in the certain knowledge that by the time that future generation accesses them they will be virtually worthless, or you could purchase 1 Bitcoin and store it in a digital wallet. If Bitcoin fails you have the same result, but if stability continues and is a sign of maturity then that future generation will be thanking you forever. That seems like a risk/reward ratio too good to turn down.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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