Volatility

Cryptocurrencies are notoriously volatile – Bitcoin alone recorded swings greater than 2 standard deviations an average of almost 20x per year over the past 5 years.

Bitcoin has swung more than 2 SDs almost 20 times a year since 2017

Source: Bloomberg

Many critics argue that this volatility will be their ultimate downfall. After all, something can’t function as a medium of exchange if its value fluctuates wildly from one day to the next. Imagine waking up not knowing whether the coins in your digital wallet could buy you a new car or a cup of coffee.

This concern is a big driver of the demand for stablecoins, which offer many of the benefits of cryptocurrencies while maintaining a 1:1 peg to the USD, Renminbi, Euro or Korean Won. In fact, Terra Luna’s TerraUSD stablecoin is already gaining significant traction in Asia, where it is used for a variety of purchases including purchasing coffee or hailing taxis.

But cryptocurrency disciples will tell you that stablecoins won’t be necessary in the long-run, because volatility is a matter of perspective. Given that we price goods in the United States in US dollars, we measure “volatility” by that standard (i.e how much did an asset go up or down in dollar value). But if you were to measure using Bitcoin as the baseline, you could argue that it’s the dollar that’s volatile!

Indeed, purists argue that’s the direction we’re headed. They believe that once cryptocurrencies gain widespread adoption, businesses will begin to use them to price goods and services. When this happens, there will be no more volatility as a 10 satoshi cup of coffee will always be worth 10 satoshis, no matter what happens to the Dollar, Yen or Won (FYI – a “satoshi” is the smallest unit of Bitcoin, worth 1/100millionth or a BTC) .

While this might seem far-fetched it should be noted that this is already happening on a limited scale. Many Web3 goods, such as NFTs, are already natively priced in Ether and not USD.