The German bank Bundesbank warned its users against Bitcoin’s volatility rate, expressing its concerns over market instability. The institution further emphasized that Bitcoin is not as safe as reserve currencies as the Euro or US Dollar.
In a statement, German Bundesbank board member Carl-Ludwig Thiele stated:
“Bitcoin is a speculatory object, the value of which changes rapidly. It may have seen steep climbs recently, but things have been different in the past.”
Bitcoin and its value
Bitcoin is a decentralized currency based on a fixed monetary policy which puts a cap on the maximum supply of Bitcoins at 21 mln. Since there is no centralized institution or governing authority, its value is completely dependent on the market and its demand.
If there is a higher demand for Bitcoin, Bitcoin price will increase. If the demand decreases, then Bitcoin price will follow.
Bitcoin’s value is not manufactured or established by a governing entity. Thus, Bitcoin price is an actual real-life depiction of its value which stems from the global Bitcoin exchange market. Fiat money or cash, in contrast, is maintained and controlled by the government. Its inflation rates can vary and governments can create cash at their demand.
Bitcoin and its volatility issue
Bitcoin is volatile and volatility is crucial for the development of Bitcoin. If Bitcoin price does not increase and remains stable at the current value, that would portray a low rate of user growth. Since the Bitcoin network is experiencing a rapid increase in user base and the emergence of institutional investors, Bitcoin price has to increase.
Volatility is a fair point to address against Bitcoin. It is not beneficial for merchants or day-to-day users who use Bitcoin as a digital currency.
However, there is a fundamentally flawed argument in Bundesbank and Thiele’s description of fiat money. Euro or USD are not safer than Bitcoin solely due to the existence of a central entity. The term “safe” means the protection from the exposure to danger or risk.
From ownership to the justification of the value of fiat money, there are many flaws in the current monetary system, which is one of the reasons why governments are attempting to digitalize cash.
In particular, if the Indian rupee is taken as an example, Indian prime minister Narendra Modi’s abrupt decision to demonetize 500 and 1,000 banknotes led to a nationwide financial crisis.
Nearly 90 percent of the country’s ATMs are out of money to dispense and as a result, residents can’t obtain enough cash to finance their day-to-day operations. To describe such monetary system as a “safer” option against Bitcoin is absolutely off-base.