Bitcoin’s volatility renders it unsuitable to protect against currency devaluation (yet)

Bitcoin and volatility: a match made in heaven. Or hell, depending on your viewpoint. 

For as long as Bitcoin has traded, its price has bounced around violently. With designs on one day becoming a store of value akin to gold, this is obviously a problem. Enthusiasts (and I am one, for the record), can wax lyrical about Bitcoin’s potential to preserve one’s wealth amid collapsing currencies, or just plain old everyday inflation. But until Bitcoin sheds its volatility habit, that is all it will be: potential. 

Take the Turkish lira (USD/TRY), a notorious (and ongoing) example of the perils of devaluation. In 2018, less than four lira were required to buy one dollar. Today, the cost of one dollar is 26 lira (and this is the official rate, the black market rate is worse). In just the last two years, the Turkish currency has lost two-thirds of its value. Over the last five, it is down 85%. 

And yet, it’s actually less volatile than Bitcoin. Now, before you break your computer, I am not for one second advocating putting any wealth at all in the crumbling Turkish lira. And like I said, I love Bitcoin. But when we are assessing its everyday use as a store of value, its volatility means that it is completely unsuitable for this task, at least for the moment. 

Bitcoiners talk about corrupt regimes with failing currencies all the time, but in the year 2023, these people need dollars or gold, not Bitcoin. Again, I’m not talking about an investment here, but for everyday life; for paying bills and putting food on the table, for buying children’s clothes and paying for bus fare. 

I saw this first hand when I went to El Salvador last year. It does not matter if Bitcoin is on an upward trajectory long-term if you are living paycheque-to-paycheque. In El Salvador, when I asked to pay with Bitcoin, I was normally met with a “prefiero dolares”, or “I prefer dollars” (both Bitcoin and the US dollar are legal tender in the country). Granted, part of the reason is that cash is simpler to execute in certain situations (not everyone in El Salvador had the technological means to accept Bitcoin), but in cases where Bitcoin payments were seamless to execute, most merchants had their wallets set up to automatically convert the Bitcoin they received into dollars once the transaction went through. 

Can you imagine what it would have been like running a small business while recouping payments (and storing that revenue) in Bitcoin over the last year or so, as Bitcoin plummeted from $68,000 to $15,500 and back up to $31,000? It’s just not possible to live with that kind of aggressive oscillation when you have day-to-day expenses to meet. 

Gold vs Bitcoin

The best way to illustrate this is not the Turkish lira, but gold. Gold is the promised land – it is what Bitcoin dreams to be: a store of value. Through Bitcoin’s fundamentals, it actually beats gold in a lot of scenarios: it is more divisible, portable, easier to store and its supply is absolutely fixed, to name a few. 

But Bitcoin is a hell of a long way off right now. Take a look at the below chart, which compares Bitcoin’s daily returns to gold’s. 

It’s like comparing a soothing massage to a three-day bender at a music festival without sleep. Again, this may change in future, but that is not the topic for this piece. Right here, right now (to quote Fatboy Slim), Bitcoin cannot compete in the volatility game. 

What does all this mean for investing?

For investing, this means Bitcoin is totally unsuitable for short-term time horizons, unless you have a premonition around which way it will go (and the efficient market hypothesis, alongside reams and reams of other studies argue that you are in very, very rare company if you can predict the market).

Over the long term, if one can stomach the volatility, it is a totally different story. In essence, that is how the stock market works, and why index funds are so popular in the long term – investors get paid positive returns for bearing the volatility along the way. But long-term investing is a topic for another day.

Gold has vastly underperformed against Bitcoin since the latter’s inception, but among smaller time periods, the tables often flip (such as last year, for example). 

Investing, especially long-term investing, is a completely different ball game than living your day-to-day life and taking care of responsibilities and financial obligations for yourself and your family.  

So next time you hear a Bitcoiner claim that Argentinians, Lebanese, Zimbabweans or Turks should put all their money into Bitcoin, remember that they’re talking absolute nonsense. That may change one day down the line, but for now, what is that saying about going out of the frying pan and into the fire?

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