MAY 7
Why Volatility Appears
The Price Moves. The Rules Keep Working.
The Signal
Bitcoin’s price can change much faster than the system underneath it.
The Reading
Picture that Alpine road. Tunnel, bridge, tunnel, bridge. Mountains rise, valleys fall, yet the drive feels smooth. With Bitcoin, understanding what happens underneath the price helps you make sense of the mountains. Volatility means large, rapid price swings. Up as well as down.
So why does Bitcoin swing so much? Because people can change their minds in seconds but bitcoin cannot change its issuance schedule to suit them.
Imagine everyone suddenly wants more cars. Manufacturers can build more. If everyone wants more bitcoin, miners cannot turn up production. Buyers must compete for coins that existing owners are willing to sell. That competition can push prices up.
Then the mood changes. Bad news arrives. Some buyers stop buying. Some owners want cash. There may be fewer people ready to buy at yesterday’s price, so the price falls. Bitcoin itself can keep working throughout. Tock Tock – Next Block!
Now add borrowing. Someone buys more bitcoin than their money could afford. When the price falls, their lender or trading platform may force them to sell. That sale pushes the price down further. Others face forced sales. Like dominoes, one movement sets off another.
Bills and loan repayments also bring pressure from the old financial system. People sell bitcoin to raise cash. This is a market full of changing minds and changing circumstances meeting a monetary system with predictable issuance. If your reasons for owning Bitcoin still stand, a lower price lets the same money buy more. Someone else’s need for cash may offer you a lower price. You still have to judge Bitcoin’s prospects. But now you can ask a better question. Has something important changed, or has the price changed because people are under pressure?
First Principles
Bitcoin keeps its issuance schedule through excitement and fear.
Borrowing can turn price movements into forced selling.
Lower prices can create opportunities to acquire more bitcoin.
Today’s Challenge
Open your calculator. Divide $100 by $100,000. Now divide $100 by $50,000.
These imagined bitcoin prices give you 0.001 and 0.002 bitcoin.
The price halved. Your $100 bought twice as much.
Which number had your attention: the falling price, or the amount you could acquire?
Tomorrow’s Signal
Time Preference Revisited