Bitcoin's Volatility Problem

Volatiity, inflation, and deflation in a money are major causes of economic and social disorder. 

Volatility

Volatility prevents the adoption in the real economy. For supply chains to work, the purchasing power of the medium of exchange enabling sequential production and trade must be reasonably stable. 

Fiat money, while inflationary, has relatively low volatility.

While more adoption as a store of value could reduce bitcoin's volatility somewhat, it is a serious misconception that it will automatically stabilise in time. Volatility cannot decline by itself to a level which is competitive to today's major fiat currencies. A fixed supply can never meet a fluctuating demand at a stable price, the latter will unavoidably result in a fluctuating value. Its volatility makes Bitcoin uncompetitive to more stable fiat currencies be it the USD, the Euro, or the Yuan where base money supply is managed by central banks, despite the significant collateral damage caused by these monopolies' fallacious approach.

Inflation and deflation

Any relevant rate of inflation or deflation also distorts relative prices, capital allocation, and production. In benign cases, this may just impede economic progress while more serious cases of inflation or deflation cause creeping economic decline.  Fiat money is prone to inflation as it enables governments to create currency out of thin air to fund overspending or to restrict supply in an overreaction when inflationary poliices result in an overheating economy. 

Inflation drives real interest rates below the natural rate which results in asset price bubbles which enrich the rich who own real assets or shares, while harming the middle class which mostly holds debt instruments denominated in the debased money.

It is also false that deflation which coincides wiht a fixed supply is any less harmful than inflation. Note an important distinction though. Lay people mistakenly think of falling prices due to technical progress as deflation while actual deflation is simply an institutional failure causing a shortage money and liquidity. 

The solution

There is only one policy which leads to a naturally stable purchasing power of a money: complementing base money stock with decentralised credit money production and destruction by competing suppliers in a free market. Centrally controlled supply of currency will always be usurped by politicians for nation states' insatiable demand for purchasing power.

The best regulator of the economy's currency supply is the invisible hand, just like for other good. No special regulation is needed when market forces are not perverted by the fiat currency idea. Market prices aggregate and communicate information,  spontaneously adapting currency supply to demand. 

Historically, this natural regulator was the discount rate for commercial bills of exchange. In Bitcredit Protocol, currency creation and reflux is automatically regulated by the minting fees of the competing Bitcoin credit mints who produce credit money from customers' non-fungible real e-bills.