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These four charts suggest that Bitcoin will stabilize in the future – The Washington Post

These four charts suggest that Bitcoin will stabilize in the future

The inwards track on Washington politics.

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In latest weeks, something interesting has happened to the price of bitcoins: It hasn’t switched very much. In December, Bitcoin prices gyrated frantically, but since the embark of the year it’s little by little gotten less volatile.

Bitcoin’s declining volatility is part of a recurring cycle the Bitcoin economy has experienced repeatedly over the past three years. It starts when a wave of publicity attracts fresh Bitcoin speculators and thrusts Bitcoin prices to unprecedented highs. That creates an unsustainable price bubble. The bubble pops, leading to plummeting prices and high volatility. But then the price little by little stabilizes, lodging on a “fresh normal” price.

This pattern suggests that the extreme price volatility that has bedeviled Bitcoin since its inception is likely to prove a makeshift phenomenon. Bitcoin prices become volatile when a wave of media attention attracts a swarm of fresh users. As the Bitcoin economy grows and matures, these growing agonies will become less frequent and less severe.

Mainstream media coverage of Bitcoin began in April 2011, at a time when one Bitcoin went for around $0.75. The chart above shows that by June 2011, Bitcoin’s price had risen 40-fold to more than $30. Then it crashed, falling below $Two in November before stabilizing at around $Five in early 2012.

Notice that after the initial boom and bust, Bitcoin’s price step by step got more stable. In January and February of 2012, Bitcoin’s price ranged from $Trio.87 to $7.22— a significant range but not the wild fluctuations of the previous year. In March, April, and May, the price stayed inbetween $Four.30 and $Five.48.

In the 2nd half of 2012, the pattern repeated itself, albeit on a smaller scale. In June, Bitcoin prices began to rise rapidly, reaching a high of $15.40 on Aug. 13. Then the currency promptly crashed, falling to a low of $7.58 before stabilizing around $13.50 in December 2012.

The pattern repeated itself yet again in the very first three quarters of 2013. From $13.50 at the begin of the year, Bitcoin’s value soared to $266, then crashed to $50 later that same month. As summer turned to fall, the price of one Bitcoin had stabilized around $130.

Eventually, here’s a chart of Bitcoin prices over the last four months. The price rose from $130 to $1,242, then crashed to $455 before stabilizing around $900.

Each of these four periods involves the same basic pattern:

1. Bitcoin gets a wave of positive press. This attracts fresh Bitcoin users who begin buying Bitcoins. The process becomes self-perpetuating: fresh users generate higher prices, which generates more press coverage, which attracts fresh users.

Two. The bubble pops, usually triggered by some kind of bad news. Many of the Bitcoin new-comers who had flooded into the market in the preceding weeks funk. That kicks off a feedback loop of its own: falling prices generate more fright selling, which thrusts the price down even more.

Three. Eventually, everyone who is inclined to panic-sell has done so, and the price bottoms out. Over the following weeks or months, there are a series of “aftershocks” as each price rise triggers a fresh wave of profit-taking. But each rise and fall is smaller than the one that preceded it.

Four. Bitcoin’s price stabilizes. Most of the bitcoins are in the palms of people who intend to hold them for the long term. With no price fluctuations to report on, press attention to the currency drops off. Bitcoins prices are relatively stable until the next boom commences.

Notice that each turn of the cycle has left Bitcoin’s price significantly higher than it was before. From an early two thousand eleven price of $0.75, the price stabilized at $Five in early 2012, at $13.50 in early 2013, at $130 in late 2013, and at $900 today.

Notice also that periods of price stability have never led to unexpected price drops. So far, major price drops have only come on the high-heeled shoes of even larger price increases. Each crash has bottomed out above the price Bitcoin was at at the commence of the preceding boom. The crash in mid-2013, for example, reached a low of $50, way above the price of $13.50 at the beginning of 2013.

The evident explanation for this pattern is that each fresh wave of publicity has expanded the Bitcoin economy. In each boom, some fresh Bitcoin users speculate for a few weeks and then cash out, creating volatility. But a significant number of the newcomers in each wave stick around, permanently expanding request for Bitcoins.

Of course, these cycles can’t proceed forever. The process depends on fresh people being drawn into the Bitcoin economy. If Bitcoin keeps growing, it won’t be long before the currency is so widely known and used that there’s little room for further growth.

Once that point is reached, we should expect Bitcoin’s price to behave the way it does in stage four of the cycle, when swings of publicity aren’t drawing fresh people into the Bitcoin economy. These are periods of price stability, like May 2012, September two thousand thirteen and right now, when the price doesn’t switch very much from day to day.

Of course, it’s significant to acknowledge that past spectacle is no ensure of future results. The fact that Bitcoin’s price has never collapsed after a period of price stability, and that price declines have never wiped out the gains from a preceding boom, doesn’t mean these things could never happen.

Still, the longer the Bitcoin economy grows, the greater confidence users will have in its continued stability. And that has significant implications for Bitcoin users. One is that volatility doesn’t strike at random. If you’re thinking about doing business in Bitcoins and you want to predict whether Bitcoin’s price is likely to fall tomorrow, you just need to look at what happened in the past duo of weeks. If prices were stable in the latest past, they’ll very likely be stable in the near future too.

2nd, when thinking about Bitcoin’s long-term future, it’s misleading to think about the average level of volatility in the past. That volatility mostly reflects the currency’s rapid growth, not something inherent in the technology. It’s mathematically unlikely for Bitcoin’s rapid growth to proceed forever. Once it slows, there’s good reason to think volatility will decline with it.

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