A thought experiment: Bitcoin volatility and jump rope

The internet has made a certain argument against cryptocurrencies loud and clear: it can never be used as a reliable medium of exchange if its price will swing wildly one day to the next. Volatility is only for the traders who can manipulate the market with pump and dump schemes, making cryptocurrencies nothing more than electronic gambling chips. Its an argument that has its merits and the evidence to back it up since there are many examples of pump and dump schemes and fraudulent activity in cryptocurrency exchanges worldwide. So, what then? Let’s pack it up, sell what you can, cut your losses, and go back to S&P index funds? Is volatility a core feature of cryptocurrencies that far outshines any supposed utility of the token?

This is where a thought experiment might help address the issue. Let’s imagine there are three people in a park with a jump rope. Two people at the ends control the rate at which they swing the rope and the person in the middle has the job of successfully jumping over it at every swing.

Anyone who has jump-roped knows that not every jump is done at the same amount of time in between each jump. In addition, not every swing of the rope is done with the same rate of speed. However, given these inconsistent variables in speed of the swing and rate of jumps, the person in the middle can adapt to this volatility and successfully jump over many of the swings. It takes time and practice, but both the jumper and the two people at the ends can adapt to the volatilities of their respective roles.

What happens when we introduce a second jumper? Or third or fourth jumper in the middle? Or maybe ten jumpers? Obviously, the rope will have to be longer, and the jumpers in the middle will have to agree on a synchronized rate at which to jump together at the same time. As they align the rate of their jumps, the two people at the end must also agree on a consistent rate at which to swing the rope so that the group in the middle successfully makes the jumps with every swing. The key elements at play in this scenario are that as more jumpers join in the middle, the lesser the volatility will come to be, both in rate of jumps and speed of swinging the ropes. One could even call this successful scenario of agreement between jumpers and swingers as representing a consensus of forces to make possible a certain outcome. More participants in a project result in lesser volatility of variable factors within the project.

Bitcoin, and many of the other cryptocurrencies, are still at the one jumper phase of this ambitious project. Market cap and money being transferred throughout each blockchain network of transactions still represent a small number of the total global economy. Each coin, each network, has its own participants, each competing in the market of ideas and solutions against the traditional system of government-issued money. Some of these coins and networks are either scams, untested networks, or overly ambitious projects doomed to fail as soon as a more promising disruptor enters the market. Apart from Bitcoin and maybe Ethereum, just about every other cryptocurrency network has yet to prove its level of security to ensure the viability of their features that are not available on Bitcoin or Ethereum base layer.

While the marketplace still matures, some coins will last, many will go bust, and some projects may even merge with others through features like Rootstock and second or third-layer technologies that work on top of more established networks. These additional layers of technologies don’t necessarily have to be forced upon the entire community since these can be done as a soft-fork as in the case of SegWit.  Or they can be opt-in functionalities like Lightning Network. With this reality, and as more users continue to join the decentralized network, consensus will still need to be reached and volatility will still exist. But as the mass of users choose with their wallets which network fits their needs best, the one with the most users will experience less volatility. It is more likely that the most secure and battle-tested network will be the foundation upon which other coins’ projects will be built upon in the near future.

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