Researchers: Bitcoin price volatility will reach legal tender standards in the next two years (Download the full report)

A research report released this month (download the full text of the Coin Library) analyzed whether Bitcoin can become a viable alternative to fiat currency. The author of this report is Vavrinec Cermak of Skidmore University. He used the GARCH model (a financial data model suitable for volatility analysis and prediction) to conduct an empirical analysis of Bitcoin's volatility. Cermak said that if the downward trend in Bitcoin's volatility continues, it will become an alternative to fiat currency within two to three years.

Bitcoin volatility steadily declining

When it comes to Bitcoin, many people say it is too volatile to be a government-issued alternative to fiat currencies. Many central banks have published research reports explaining how Bitcoin’s volatility prevents the cryptocurrency from competing with fiat currencies. Just recently, a board member of the German central bank (Bundesbank) said that Bitcoin is too volatile and is a high-risk investment. Cermak’s research report also confirms the central bank’s view, but he believes that this situation may change in the next few years.

Cermak explained in the report:

Bitcoin volatility is steadily decreasing.

GARCH Model

Cermak said that in order to study the volatility of Bitcoin against fiat currencies, he first thought of two schools of economics - Austrian and Keynesian. The Skidmore University scholar used the GARCH model, which is common in economics and econometrics. The GARCH model is used to evaluate and express statistical data through a series of time frames or data guidelines. Cermak explained that this research model shows that Bitcoin's "biggest obstacle to becoming a unit of account is its high volatility."

This proves that Bitcoin cannot yet become a unit of account. However, this does not mean that it cannot become a unit of account in the future. Once the volatility of Bitcoin reaches the standards of other legal currencies, countries are likely to regard Bitcoin as a unit of account.

Reaching legal tender standards

The report points out that Bitcoin is currently a scarce digital commodity with a limited supply. Despite this, Cermak said that users will still use Bitcoin as a payment system or digital currency. Due to the volatility of Bitcoin's value, most users and merchants can only convert it into legal currency immediately to avoid losses. However, Cermak's research results show that under the premise of sufficient daily trading volume, Bitcoin's volatility will reach legal currency standards within two to three years. Cermak said:

Bitcoin volatility is trending down. If the trend of the previous six years holds, Bitcoin volatility will reach fiat currency standards between 2019 and 2020.

Cermak’s research is similar to a study by bitcoin proponent and data analyst Willy Woo, who predicted that bitcoin volatility will reach fiat currency levels by July 2019.

Bitcoin’s volatility is gradually decreasing and will reach fiat currency levels (less than 5.5%) in July 2019.

Increased popularity

Cermak mentioned that another factor that contributed to the decline in Bitcoin volatility was Bitcoin derivatives trading, which allows users to hedge and short sell through the futures market. Bitcoin price volatility is getting smaller and smaller, Cermak said, and the absence of a central institution such as a central bank also reduces systemic risk. If Bitcoin volatility can reach the legal currency standard in the next two years, some small countries will begin to accept this cryptocurrency as the country's legal currency.

If the volatility of Bitcoin reaches the standard of legal currency, then it will be able to meet the functions of currency and will be conducive to its large-scale popularization.