Does Bitcoin’s Volatility Mean It’s Risky? Not Really.

This article originally appeared on Forbes.com.

Bitcoin’s recent price action has been nothing short of a spectacle, setting multiple all-time highs over the past few weeks while simultaneously experiencing sharp downturns. But volatility is not the same as risk.

Daily swings of 5% or more have become commonplace, creating a rollercoaster effect that feels exhilarating to seasoned bitcoiners but unnerving to the traditional investors who are now entering the market in greater numbers. For those accustomed to the slow, steady pace of conventional assets, bitcoin’s volatility is a source of anxiety. But what do these wild fluctuations actually signify?

When most people hear the term "volatility," they instinctively equate it with danger. An asset that experiences sharp price swings must be risky, right? Not exactly.

While volatility measures the frequency and magnitude of price changes, risk is an entirely different concept: the probability of a permanent loss of value or erosion of an asset’s purchasing power over time.

This distinction is crucial, especially when considering assets like bitcoin. Its rapid price fluctuations often lead to knee-jerk assessments of “too risky.” But is volatility simply misunderstood in the context of its unique monetary properties and role as an emerging asset class?

The Hidden Risks of Fiat Stability

To truly understand risk, consider the U.S. dollar. On the surface, the dollar appears stable. Its value doesn’t fluctuate wildly against consumer goods day-to-day, and it’s universally accepted.

Yet beneath this veneer lies a risk that few acknowledge: the consistent erosion of purchasing power through money supply expansion.

Over decades, the Federal Reserve has steadily debased the currency it is charged to protect in order to finance government debt, bailouts, and economic stimulus programs. This has been allowed to occur because a small cabal of technocrats control the price of money.

A few months ago, free market supporters were in an uproar when Democratic leaders suggested that price controls be imposed on consumer goods. But there is no comparable response to the fact that price controls are already imposed on money itself – the most salable (i.e., tradable) good of all.

Printing money is politically expedient, but it is the equivalent of a tax on people and businesses that hold cash. In many cases, these are members of the lower and middle classes, who are less likely to have a sizable portion of their net work invested in assets.

As the supply of dollars grows unchecked, the currency's purchasing power declines. The risk is subtle but pervasive: year after year, your dollars buy less.

Wages may eventually catch up, but surprisingly little consternation is spent on the emotional strain while wages lag behind inflation, forcing workers and business owners to continually reassess prices, employment arrangements, capital investments, and other aspects of business operations.

In this environment, savers are told that if they want to keep pace with inflation, they would be silly not to “invest” their money in risk-laden financial instruments that they probably do not fully understand.

Bitcoin’s Volatility: A Feature, Not a Bug

Bitcoin’s volatility reflects something fundamentally different from the wealth erosion of fiat. Bitcoin is going through a process of price discovery, where millions of individuals, institutions, and nations are determining its role in the global financial system. Economists refer to this phenomenon as the “monetization process” where an asset transitions from serving a niche to becoming widely accepted.

During this period, bitcoin’s price is swinging dramatically. Early adopters speculate on it, institutions cautiously test the waters, and everyday people react to news, emotions, and trends. This volatility, while unsettling to some, is a natural stage in the lifecycle of any asset undergoing rapid adoption. Over time, as adoption matures and liquidity deepens, bitcoin will be further along in its journey of price discovery. Its volatility would be expected to diminish, much as gold’s purchasing power stabilized as it gained universal acceptance.

The Illusion of Stability in Traditional Systems

Policymakers and central bankers often present their interventions as necessary to ensure “stability.” Through mechanisms like interest rate manipulation, quantitative easing, and outright market interventions, they attempt to smooth over volatility in traditional markets.

But this veneer of stability comes at a cost – it masks systemic vulnerabilities and concentrates risk.

Consider how unelected central bankers make decisions that affect the economic well-being of billions, manipulating interest rates and printing currency with few checks on their power. The appearance of stability masks an underlying fragility. If a currency devalues rapidly, as seen in hyperinflation or currency crises, the fallout can be catastrophic, erasing savings and destabilizing society.

Since 1971, when the United States abandoned the vestiges of the gold standard and fully transitioned to a dollar system based purely on fiat, there have been dozens of hyperinflation events worldwide. According to a comprehensive study by economists Steve H. Hanke and Nicholas Krus, there have been 56 episodes of hyperinflation in recent history.

Bitcoin’s volatility, in contrast, does not conceal its risks. Its value is determined transparently in open markets, without backroom deals or interventionist policies. This transparency may appear chaotic in the short term, but it is physically impossible for bitcoin to hyper-inflate without the consent of its users. This ensures that risks are priced in honestly rather than hidden beneath layers of financial engineering.

Volatility as an Opportunity

For long-term investors, volatility is an opportunity. Price fluctuations create entry points for those with a clear understanding of an asset’s fundamentals. Bitcoin’s volatility, far from being a weakness, signals a dynamic, evolving market.

In a world where fiat systems are increasingly strained, bitcoin offers a different kind of risk – one that is visible, understandable, and reliably constant. Compare this with fiat currencies, whose risks are obscured by policy decisions and centralized control. Over decades, bitcoin’s fixed supply, transparent governance, and growing adoption mean that it less risky than fiat currencies, even if its price remains more volatile in the near term.

Embracing the Future

Understanding the distinction between volatility and risk is key to understanding what is really happening with bitcoin today. Rather than watching the price of bitcoin to try to determine its value, start by understanding that it follows a fundamentally different model for how money can work, one based on transparency, scarcity, and beyond the control of individuals and political interest groups.

As bitcoin matures, its volatility is likely to settle, leaving behind an asset whose long-term stability is built on solid fundamentals, not centralized control. Bitcoin’s volatility doesn’t mean it’s risky. For those willing to look past the short-term noise, volatility is not something to fear – it’s a sign of transformative potential.