German Central Bank: Bitcoin is far less secure than reserve currencies such as the euro and the dollar

Germany’s central bank, the Bundesbank, has warned its users about Bitcoin’s volatility, expressing concerns about market instability. The institution has further stressed that Bitcoin is not as safe as reserve currencies such as the euro or the dollar.

Central bank board member Carl-Ludwig Thiele said in an interview:

Bitcoin is a speculative asset and its price fluctuates widely. It is true that the price of Bitcoin has been rising recently, but the past was a different story.

Bitcoin and its value

Bitcoin is a decentralized currency based on a fixed monetary policy with a maximum supply of 21 million. Since there is no centralized institution or management authority in this system, the value of Bitcoin depends entirely on the market and its demand.

If the market demand for Bitcoin is high, the price of the currency will rise; if the demand decreases, the price of the currency will also fall.

The value of Bitcoin is not determined by a governing body. Therefore, the price of Bitcoin is a reflection of its true value, and the specific data mainly comes from the global Bitcoin trading market. This is completely the opposite of legal tender or cash, which is maintained and controlled by the government. Inflation rates vary, and governments can issue cash according to their needs.

With the introduction of appropriate expansion options and solutions, Bitcoin has gradually transformed into a digital cash system, and low volatility is beneficial to Bitcoin users. At this stage, Bitcoin's user base and market value are both in a rapid growth stage, so the price of the currency will also rise. From a technical perspective, the increase in the value of Bitcoin can indeed be considered as a manifestation of volatility, which allows banks to take advantage of the loophole and make statements such as "Bitcoin is highly volatile."

Bitcoin and its volatility problem

Bitcoin prices are volatile, and volatility is an important part of Bitcoin's development. Once the price stops rising and the value remains constant, the user growth rate will not increase. It is precisely because of the rapid increase in the user base of the Bitcoin network and the emergence of institutional investors that the price of Bitcoin will rise.

High volatility is indeed a weakness of Bitcoin, which has disadvantages for merchants or everyday users who accept this digital currency.

However, there is something fundamentally wrong with the Bundesbank’s view and Thiele’s comments about fiat currencies. The euro and the dollar cannot be more secure than Bitcoin simply because of the existence of a central authority. “Security” should mean protecting users from risks.

From the perspective of value explanation from ownership to fiat currency, the current monetary system has a lot of flaws, which is one of the reasons why the government plans to digitize cash.

Take the Indian rupee, for example. Prime Minister Narendra Modi's sudden decision to abolish 500 and 1,000 rupee notes led to a nationwide financial crisis.

Nearly 90% of the country’s ATMs are cashless, so citizens lack access to enough cash to support their daily lives. It would be a stretch to call this type of financial system a more “secure” option than Bitcoin.