A recent research paper published this month analyzes whether or not bitcoin can be a viable alternative to fiat currencies. The report, authored by Vavrinec Cermak from Skidmore College, offers an empirical analysis of bitcoin’s volatility based on a GARCH model. Cermak details that if bitcoin’s trend of decreasing volatility continues it could be a functioning alternative to fiat in 2-3 years.
Bitcoin Volatility is Steadily Decreasing
When people discuss bitcoin, many people say that bitcoin is too volatile to be an alternative to government-issued fiat currencies. For instance, many central banking entities have written many research papers explaining that bitcoin’s volatility makes the cryptocurrency not fit to compete with fiat reserves. Just recently a board member of the German bank, Bundesbank, stated that bitcoin was too volatile and a risky investment. Cermak’s paper agrees with central bankers to a point, but also believes things could change in the next few years.
“The volatility of bitcoin has been steadily decreasing throughout its lifetime,” explains Cermak’s paper.
Using the GARCH Model While Considering Both Austrian and Keynesian Economic Schools of Thought
Cermak says in order to determine bitcoin’s viability against fiat, two schools of economics were taken into consideration — Austrian and Keynesian. The Skidmore College researcher also uses the GARCH model often used in economics and econometrics. GARCH models measure and characterize statistics by utilizing a series of time frames or an index of data. Cermak explains that the research model shows bitcoin’s “biggest obstacle in becoming a useful unit of account is its high volatility.”
“These are clear indications that Bitcoin is not sufficient as a unit of account yet,” details Cermak. “However, that does not necessarily mean that it will never be. If Bitcoin’s volatility ever reaches the levels of other fiat currencies, it would be entirely possible for countries to use bitcoin as a unit of account.”
If Bitcoin’s Volatility Continues to Decline, It Could Match Fiat Levels by 2019-2020
The research paper states presently bitcoin acts as a scarce digital commodity with a finite supply. Nevertheless, users also utilize bitcoin as a payment system or digital form of currency, Cermak explains. Because bitcoin’s value is so volatile, this makes a lot of users and merchants resort to converting to fiat almost immediately to hedge against losses. However, Cermak’s research suggests that bitcoin could meet fiat volatility levels in 2-3 years when traded daily volumes are sufficient. Cermak’s report states;
The volatility levels have historically been trending downward and if Bitcoin were to follow the same trend as it has been for the previous six years, it would reach the volatility levels of fiat currencies approximately in 2019-2020.
Another interesting study written by bitcoin proponent and data analyst Willy Woo has a very similar theory to Cermak’s research paper. Woo predicts bitcoin volatility will match fiat currencies by July of 2019.
“What we are seeing is bitcoin’s peak volatility is reducing steadily and will enter the realms of fiat currency (below 5.5%) by around July 2019,” explains Woo in October of 2016.
Ready for Mass Adoption
Cermak also details that another factor that is helping limit bitcoin volatility is due to bitcoin derivative exchanges, which allow users to hedge and short sell by utilizing future markets. Even though bitcoin’s price fluctuations are becoming more subtle, Cermak also says the absence of a central bank minimizing systematic risk, could make it so bitcoin never reaches fiat volatility levels. Although, if bitcoin does match the volatility criteria of stable fiat currencies in the next two years, Cermak details that small nation states could easily adopt the cryptocurrency for the country’s local tender.
“If Bitcoin approaches the volatility levels of fiat currencies, it will satisfy the criteria of being a functioning currency and therefore, will be ready for mass adoption,” Cermak’s paper concludes.
Do you think bitcoin’s volatility could match fiat currencies in two years? Let us know in the comments below.
Images via Shutterstock, Pixabay, and the Woobull blog.
Need to calculate your bitcoin holdings? Check our tools section.