If there is one thing that everybody can agree on with Bitcoin – its price volatility. Every so often, news headlines over all media platforms scream about the eruptive high gains and thunderous crashes.
Bitcoin (BTC) and other Cryptocurrencies (Crypto) have become an asset class with price fluctuations never seldom seen at such frequency. In April 2021, Bitcoin reached its all-time high of $64,863. This hike added on top of a $40,000 gain in January, up from just below $24,000 in December 2022. That’s a 66.67 increase in over a month!
Yet, Bitcoin suffered massive losses, such as the price crash in June 2021 when the price fell close to $34,000. The daily fluctuations are unpredictable and nerve-racking for newbie investors. The massive gains are tempting to some, but the high risk keeps many investors wary of Bitcoin’s long-term future.
Volatility is an understood and accepted variable in the investment world, and all investments carry risk. Bitcoin and the likes of Ethereum, Ripple, and Cardano (ADA) might seem like risky investments. However, with enough research and forward-thinking, you can manage the volatility.You can level up your knowledge with CoinJournal to stay connected with trends affecting volatility.
Understanding why Bitcoin prices fluctuate rapidly is crucial to making the most of your investments in Crypto.
We will look at five reasons why the price of Bitcoin is so volatile:
But before we begin: What is Volatility?
What is Volatility in investments?
When it comes to financing and investing, volatility is the change in asset prices over time. Volatility is a significant metric of investing, as this gives investors a way to measure risk and access the quality of an asset.
Moreover, you can calculate volatility by comparing the asset’s average price to its price fluctuations.
Some factors which affect volatility include:
- Inflation trends
- Major weather events
- Oil and currency prices
- Economic activity
5 Reasons Why Bitcoin is so Volatile
1. Market Sentiment
As there is no clear value attached to Bitcoin, it’s ruled by market sentiments and narratives.
A store of value dictates how useful an asset will be in the future. While the future of Bitcoin remains to be seen, speculation will continue on its store of value.
Though, what Bitcoin and other cryptocurrencies plan to offer is a method of value transfer. While its store of value is uncertain, Bitcoin promises to make transactions effortless, cheaper, and more secure than traditional payment systems.
2. Fraudulent Activities
Aside from rapid price fluctuations, fraud and illegal activities headlines constantly. Bitcoin price levels become more volatile with the discovery of new security issues and scams.
The foundation of Bitcoin is open-source blockchain technology. Community members can duplicate the source code for various projects. However, this leaves the software open for use in illegal activities.
Some well-known stories that affected prices like the Yapian Youbit exchange, which went bankrupt in 2017. Another is the documented illegal drug transactions via Silk Road in 2013 using Crypto. These stories can scare investors. Yet, one has to look at the long-term trends to make predictions.
3. The Taxman is Watching
To the IRS, Bitcoin is an asset rather than a currency. These decisions have had an impact on the volatility of Bitcoin.
There are two negative effects caused by the IRS classes Bitcoin as an asset:
- The intricacy of using Bitcoin as a payment method
- Calling all Crypto property is a sign of strict regulations to follow
The IRS is still working out the regulatory framework, and its intentions are not too clear yet. This will remain an uncertainty which investors need to price into Bitcoin.
4. Lack of Regulation
The decentralized nature of cryptocurrencies means that no central authority like a government can control them. This does not fit well with policymakers.
Users determine the value of Bitcoin and believe in the future of virtual currency. Negative views by policymakers and proposed regulations can cause the Crypto market to fluctuate widely.
Efforts by governments to initiate crackdowns on Crypto mining like recently in China cause large price swings in crypto exchanges. Yet, Bitcoin and other cryptocurrencies seem to manage these sentiments.
5. Short-term Thinking
The Crypto market is populated by first-time investors and those looking to make a quick gain. Some asset management firms barred investments in bitcoin back in 2018, which took long-term investors out to the market.
As the price volatility is so dramatic, long-term investors are not comfortable with the potential losses.
Therefore, short-term traders populate the marketplace who buy and sell Crypto daily. The increase of retail investors skyrocketed over the past two years, adding fewer experienced investors into the market.
While experienced investors know how to handle price fluctuations, newbie investors panic easily and cause sell-off, affecting prices.
As we have seen, many factors influence the volatility of Bitcoin and other cryptocurrencies. Stories of security breaches, lack of regulation, government crackdowns, and investor panic all play a role. As an investor, you need to learn about volatility and strategize how Bitcoin can be a long-term investment for your wealth.