Can Bitcoin's Volatility Be Tamed?

The global telecommunication revolution, starting with the production of the first fully programmable computer in the 1950s, has encroached on an increasing number of material aspects of life, providing engineering solutions to age-old problems. While banks and startup firms increasingly utilized computer and network technology for payments and recordkeeping, the innovations that succeeded did not provide a new form of money, and the innovations that tried to provide a new form of money all failed for a variety of reasons, until the emergence of Bitcoin in 2009. Bitcoin represents a new technological solution to the money problem, born out of the digital age, utilizing several technological innovations that were developed over the past few decades and building on many attempts at producing digital money to deliver something that was almost unimaginable before it was invented.

Bitcoin can be defined as software for operating a peer-to-peer payment network with its own hard money, without having to rely on a trusted third party. As this payment network has been operating virtually without fail for nine years, it is the author's contention that Bitcoin's importance lies in it being the first working technology for digital cash and digital hard money.

Satoshi Nakamoto's motivation for Bitcoin was to create a "purely peer-to-peer form of electronic cash" that would not require trust in third parties for transactions, and whose supply cannot be manipulated by any outside party. In other words, Bitcoin would bring the desirable features of physical cash (lack of intermediaries, finality of transactions) to the digital realm, and combine them with an iron-clad monetary policy that cannot be manipulated to produce unexpected inflation to benefit an outside party at the expense of holders. Nakamoto succeeded in achieving this through the utilization of a few important though not widely understood technologies: a distributed peer-to-peer network with no single point of failure, hashing, digital signatures, and a system for transaction validation that creates a large asymmetry between the cost of initially validating a transaction and the cost of subsequently verifying its validity.

Bitcoin succeeds as digital cash because no single party needs to be trusted for the processing of transactions. All members of the peer-to-peer network keep an identical record of all transactions and coin ownerships. Bitcoin "miners" compete by...