Bitcoin's Price Swings Just Show an Adolescent Growth Spurt

Even as newfound confidence pushes Bitcoin to record highs and as banks and policymakers issue guidance globally on the cryptocurrency, we keep returning to the same questions about its future.

Sure, Bitcoin's rise from $13.45 a year ago to $683.84 as of Wednesday seems great, but doesn't the currency's volatility make it ineffective as a medium of exchange?

If prices regularly fluctuate between $800 and $1,200, how will it ever become more than a speculative asset? Won't people want to hold onto their Bitcoin to bet on future gains instead of using it for day-to-day transactions?

It's a nuanced question with many answers depending on your timeframe.

In the short term, there are reasons why volatility may actually be beneficial. It drives customer adoption of Bitcoin, as media outlets report on every short-term price bubble – in the process, educating the public at large on the currency's benefits.

While we're in this early, more volatile educational period, there are several services (including one provided by my company, Coinbase) that shield merchants from volatility risk by doing instant exchanges. When orders come in, our platform instantly converts Bitcoin to U.S. dollars so our merchant customers don't bear foreign exchange risk.

And if we move farther out and take a longer-term outlook, there are reasons we believe volatility will ultimately go down, making it stable enough to become a useful medium of exchange.

The current volatility in the market partly stems from uncertainty about how regulators around the world will treat the currency. But this has become much clearer in the last three months, with central banks from China to the U.S. to New Zealand issuing statements on the currency.

For example, the People's Bank of China doesn't consider Bitcoin a currency and has warned companies not to price their products and services in Bitcoin. But the central bank seems comfortable with allowing people to invest in it.

Meanwhile in the U.S., policymakers have spoken favorably about the currency's future so long as money laundering risks are handled properly.

This is helping Bitcoin enthusiasts properly price the currency's future market size in different countries around the world.

Secondly, instruments that are commonplace in markets for fiat currencies like call and put options are emerging for Bitcoin. Mature futures markets should help with price discovery.

Thirdly, it's becoming easier to buy and sell Bitcoin. In the early days, complicated international wire transfers or face-to-face meetups might have been necessary to exchange local currencies for Bitcoin. This hampered liquidity in different exchanges around the world – something we still see today in discrepancies in pricing between exchanges like Bitstamp, BTC China and Mt. Gox. But services like ours and from other competitors are making it easier to trade Bitcoin through SMS text messages or e-mail.

As more consumers pile into Bitcoin and the currency's market capitalization increases, any handful of trades will not have as strong an effect on the currency's price swings.

Bitcoin volatility is already declining in percentage terms. The currency's strongest swings in percentage terms happened back in 2011, when it traded at anywhere from $2 to $32.

Over time, as Bitcoin's price stabilizes, it will start to make more sense for some consumers to take advantage of the currency's lower transaction fees and make purchases with it rather than their local currencies.

That's when we'll see its true disruptive promise emerge.

Brian Armstrong is a co-founder and the CEO at Coinbase in San Francisco.