Is bitcoin too volatile for adoption?

Bitcoin is way more volatile than most monies and this is a likely reason for its limited global use as a medium of exchange. If bitcoin is to become a more widely adopted form of money, its volatility will have to decline, either as a prerequisite for, or in lockstep with increased adoption.

If treated as an investment, the answer is somewhat different. Bitcoin has been and, compared to other assets, remains volatile. An asset may be volatile for two reasons. The first is uncertain prospects. As Bitcoin has developed and continues to develop, the risk surrounding its likely potential and future use decreases. The second is a relatively illiquid market, where smaller volumes of trades can move the market up and down substantially. Over time, bitcoin’s daily market liquidity has grown larger than all but four equities in the global market. As Bitcoin matures and liquidity expands, its volatility will likely continue on its downward trajectory.

As an investment, bitcoin’s volatility must be viewed within the context of its risk-weighted returns. By risk-weighted metrics such as the Sharpe or Sortino ratios, bitcoin compares very favorably against other investable assets.