jimmysong on Nostr: Volatility is our Protection ———————————— "Bitcoin is too ...

Volatility is our Protection
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"Bitcoin is too volatile." How many times have you heard that from normie nocoiners? I know for myself, it's the biggest reason that I've heard for why there's not greater adoption.

Indeed, it's an understandable objection. The upside is great, but volatility and risk are not, at least from a normie point of view. After all, if the point of saving is to mitigate risk for the future, then volatility does the opposite because there's less predictability in purchasing power.

Yet if we examine things a bit further, what they ask for is something that cannot exist in a fiat economy. Let me explain.

The behavior that is sought by the people that complain about Bitcoin being too volatile is an asset is something like the various fiat currencies that are stable to the dollar. For example, the Euro, the yen and the Canadian/Australian dollars have fluctuated, but have stayed in a reasonable range of the dollar, not really deviating more than 25-30% from the average over the last 20-30 years.

Yet their lack of volatility is decidedly artificial. It's the result of central bank operations. They keep their currencies within a peg range against the dollar by buying/selling dollars as needed. Obviously, Bitcoin doesn't have a central bank, so there's no stabilization mechanism and thus is a lot more volatile.

Other than a few currency traders, nocoiners generally don't invest in foreign currencies despite there being relative stability and little volatility. They want the upside of Bitcoin as well. The returns of Bitcoin have been staggering, especially compared to traditional assets since its inception 15 years ago. The nocoiners want the large upside without the volatility. They want an asset that goes up over the long term with little to no volatility in the short term.

But this is impossible. Suppose such an asset existed. Say an asset went up 50% a year without volatility. What would happen?

The main feature of central bank backed fiat money is that there's no opportunity cost for money and loans are basically infinitely available. So say the loans are available at 10% yearly interest. The wall street finance bros in that case can easily buy the asset with the loan to make a cool 40% profit. They would do that all day long because making 40%/year is very difficult.

But because they need to *buy* the asset to make this trade work, this trade would cause the asset price to rise. But even if the asset price goes high enough that it's no longer 50%/year, but 20%/year, they would still continue because there's a 10% margin that they can make. Indeed, they will continue borrowing and buying for this trade until the asset's yearly price increase is at or below the loan rate.

Indeed most of the profit available in the market have gone to bankers for this reason. Profitable things (companies, assets, etc.) all get arbitraged to death through these infinite loans.

So why doesn't this dynamic happen to Bitcoin? It's the volatility, particularly to the downside. The problem with using loans to buy the asset is that when you're underwater on the loan, you get liquidated. And liquidation makes the downward volatility worse! In other words, the giant volatility swings add significant risk to the loan-based strategies, and the more people doing them make the risk worse, even in the face of the massive profit margins.

Bitcoin volatility is our protection against fiat games taking over. The volatility adds risk, which prevent the loans from being too easily given, making the borrow and buy trade harder. The volatility also clears out the leverage, which ultimately comes from money printing.

Volatility makes the levered players, the privileged players in the fiat system, lose. And that means the normal people, the ones that can't get loans or leverage win.

Volatility is the plebs' protection.