Bitcoin's Price Swings Reinforce Status As A Schelling Point

Volatility is a feature, not a bug, accelerating the transfer of coins to high-conviction holders.

Is bitcoin's volatility a feature, not a bug?

Bitcoin is the obvious collective solution for global monetary debasement. It is a "Schelling Point" for money printing and inflation. While critics note that its volatility detracts from its ability to serve as money or a store of value, bitcoin's price swings may actually help reinforce this role.

Bitcoin As A Collective Solution

The idea of a Schelling point was coined by Nobel laureate Thomas Schelling. It represents a focal point or solution that individuals gravitate towards when coordinating without communication, particularly in situations of uncertainty or incomplete information. The Schelling point emerges as a natural point of convergence based on shared expectations, common knowledge, or prominent features of the context, leading people to independently select the same option even in the absence of explicit coordination.

For example, if two people were told to meet in New York tomorrow, but were not told exactly when and where, they might naturally choose Grand Central Terminal at noon, due to its prominence as a landmark and established reputation as a meeting place. Noon is also a natural and obvious time to meet.

Schelling points are characterized by their simplicity and intuitive nature, making them attractive choices for coordination in various social, economic, and strategic scenarios. They serve as effective tools for facilitating coordination and achieving mutually beneficial outcomes in decentralized decision-making contexts.

Liquidations And Sudden Price Movements

In a Twitter/X post, III Capital's Joe Burnett describes how excessive leverage causes bitcoin's characteristic, apparently random bouts of volatility.

Leverage tends to build up at certain points in the market (such as right before the all-time high). When this becomes excessive, it is often flushed out in a series of cascading liquidations, amplified by spot traders with a short-term horizon selling to avoid losses. Ultimately the market bottoms as traders with a higher time preference step in and snap up the discounted coins.

Thus bitcoins are taken from weak hands and those who use irresponsibly high leverage, and redistributed to strong hands, who will not sell them easily. A new base at the bottom of the liquidation cascade is built, providing a foundation for the next stage of the bull market.

Conviction Go Up

Bitcoin's volatility thereby functions to move coins to investors with high conviction, reinforcing the role as sound money and a long-term store of value.

Looking at it another way, bitcoin's volatility isn't a bug, but a feature. It accelerates its adoption as the Schelling point for the financial system. Those who recognize this take advantage of it ("buy the dips"), while those who lack conviction are shaken out.

Ultimately, this cycle has repeated many times over Bitcoin's 15-year history, and has powered its meteoric rise from tenths of a cent in 2009 to tens of thousands of dollars in 2024.


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