There is no price stability mechanism built into Bitcoin. The recent price volatility of Bitcoin had many conclude that Bitcoin is unstable. However, it is essential to remember that Bitcoin has been created for systemic stability and not for price stability. Therefore, Bitcoin is highly stable as a system even though not as stable in its price.
It is not possible for a monetary system to be stable in price and its systemic nature. Several unpredictable events happen. To bring in some stability in the prices of fiat currencies, central bankers deal with these demands by currency peg and interest rates.
The Central Banks engineers the stability of the fiat currencies. Sometimes this can even cause systemic instability.
The security of the Bitcoin network contributes to its systemic stability. Bitcoin is considered to be the most secure computer system that has been ever created. This is because of its tremendous hash power.
Saifedean Ammous in his book the Bitcoin Standard wrote, “Difficulty adjustment is the most reliable technology for making hard money and limiting the stock-to-flow ratio from rising, and it makes Bitcoin fundamentally different from every other money (emphasis added).”
When the price of the Bitcoin goes up, there is more of hash power coming to the network. The security of the system improves. The supply for Bitcoin is fixed, and as the demand fluctuates, the price will fluctuate as well.
The actions of the central bank interfere with price stability. This leads to the central banks interfering with the price signals existing in the market. This will lead to investors haphazardly misallocating their funds. The biggest banks in the nation have extreme capital levels, and therefore, all are now meeting with supervisory expectations for their capital planning. There were systemic stability concerns in the traditional markets, but they were not solved due to the natural design of the fiat currency systems. The short-term price stability usually happens at the expenditure of the instability to the system.
Something beautiful about Bitcoin is that it provides us with the choice of being able to own financial assets outside the traditional fiat currency system. From the perspective of systemic design, both Fiat currencies and the Bitcoin are fundamentally different. It is ultimately about how much one values price stability. Whether the systemic security of Bitcoin works out to be an insurance policy is also a question to be answered.