While Bitcoin’s price was wildly unstable this week, we must remember that while it has systemic stability, it doesn’t have price stability – and it cannot have them both. Compared to Facebook’s Libra, the new cryptocurrency, Bitcoin is opposite to fiat currencies such as Libra, which was designed for price stability, and not systemic stability. Nonetheless, Libra is exposed to the same instability that traditional financial systems go through during certain periods.
According to Forbes’ Caitlin Long who is a Wall Street veteran and the former chairman and president of Symbiont, Bitcoin “is a system that prioritizes security over price stability. Bitcoin’s systemic stability stems from the security of its network.”
While the volatility did make many headlines, Bitcoin’s network security was at an all-time high, which made bitcoiners quite excited.
Hash power was higher and Bitcoin was immune to attacks, and its hash power size is what made Bitcoin survive in time, added Long, explaining the price fluctuation is proportional with the demand fluctuation:
“Bitcoin has a systemic-stability mechanism built into it, but not a price-stability mechanism built into it. Bitcoin’s supply is fixed, so its price will fluctuate directly as demand for it fluctuates.”
Meanwhile, Facebook’s Libra can face systemic crises, even if it’s more price-stable than Bitcoin in short-term. Nonetheless, Longs adds that it will be interesting to see if the Libra Association will invest in bitcoin or other assets that are “more systemically stable than fiat currencies.”
In conclusion, Bitcoin is a way to offer investors own financial assets that are not part pf the traditional fiat-currency system. Bitcoin is different than fiat currencies, and it is a choice investors choose: what do they value more – price stability or systemic stability?
“Only in retrospect will it become clear how valuable that choice turns out to be,” concluded the Wall Street veteran.