The big headline at the start of the week was the British pound, which fell to a historic low after new Prime Minister Liz Truss announced a package of tax cuts.
Investors feared the move would undermine confidence in the pound, and the sell-off pushed its value down to a record low of $1.03. Headlines were full of Armageddon-style warnings, debates about the pound’s future, and speculation about what comes next.
One thing that struck me was how this episode highlights just how far Bitcoin still needs to go before it can be considered a reliable form of money.
As shown in the chart below, the pound dropped nearly 7% to $1.03 before recovering to trade around $1.07 at the time of writing.
GBP/USD chart via TradingView
Bitcoin
By contrast, when we look at Bitcoin’s daily returns, a 7% move is relatively routine. I plotted Bitcoin’s daily returns over the past year to illustrate this. In fact, over the last 12 months there were 23 days when Bitcoin moved 7% or more in a single day (11 down, 12 up).
Clearly, that level of volatility is unacceptable for a currency or a dependable store of value — which is exactly why Bitcoin cannot yet be regarded as either. It has a long way to go.
I remain a strong believer in Bitcoin’s potential, but it’s simply unrealistic to call it a recognized store of value right now. The panic surrounding a 7% plunge in GBP illustrates this point better than most arguments. In crypto circles, a 7% move barely makes the headlines.
When I visited El Salvador this summer, I saw Bitcoin’s limitations firsthand. Citizens reported feeling uneasy because of the volatility, and many configured the national Chivo wallet to immediately convert any Bitcoin payments they received into US dollars so they wouldn’t have to bear the price swings.
One statistic should be enough to show how far Bitcoin must travel: the largest cryptocurrency fell about 70% from its all-time high less than a year ago (November 2021). Imagine being 100% allocated to Bitcoin and calling it your store of value — that would be objectively irresponsible.
Is Bitcoin becoming less volatile?
I plotted all of Bitcoin’s daily percentage moves back to 2014. The results do not show any dramatic reduction in volatility.
However, Bitcoin has only truly entered the mainstream over the past two years, during the COVID era. Before that it was largely a niche asset operating in the more esoteric corners of the internet. It’s possible that the coming years will be the most important for any lasting decrease in volatility.
One thing is certain: the current turbulence in the pound demonstrates how much further Bitcoin must progress to achieve its goal of becoming a widely accepted store of value.