Bitcoin lived up to its reputation of not being a stable store of value over the weekend, as BTC China was forced to suspend Yuan deposits from the China Merchants Bank. This further raises the uncertainty regarding regulation in China, which has been a subject of speculation since early December 2013 when the People’s Bank of China (PBOC) issued a warning on Bitcoin: “First, it possesses high speculative risk: the current Bitcoin market capacity is relatively small; it is open to 24 hour continuous trading; there is no limit to how much the value can change； and the price can easily be controlled by opportunistic speculators, generating severe volatility and huge risks. Ordinary investors who blindly follow the crowd can easily suffer major losses.”
Ironically, the report triggered even more speculation, supporting the statement to a certain extend. Persistent speculation in general could mean a big problem to the digital currency, as businesses and consumers alike are weary of getting involved in a currency that is not a stable store of value.
Store of Value
A store of value is “the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.” Obviously, a currency that loses 14 percent of its value over the weekend does not meet this criteria, especially since this is not a rare event at all. It can be observed that the current 1-day volatility of Bitcoin is about 6.55 percent.
A volatility, or standard deviation, of 6.55 percent means that price levels will shift by more than this threshold in 32 percent of all cases. A 1-day loss of more than 7 percent would therefore be expected to occur on 15 percent of all days, a little more than once a week. For comparison, the 1-day EUR/USD volatility over the past 30 days is only 0.17 percent. This is also less than the expected Bitcoin volatility for the next five minutes, and shows that Bitcoin and other cryptocurrencies still have a very long way to go before they could become mainstream.
