Why is Bitcoin So Volatile?
Bitcoin went public in 2019, setting the stage for its rise as one of the most sought-after cryptos worldwide. In 2010, the price of a single coin was $0.09, and today, more than a decade later, its prices have risen to tens of thousands of dollars.
In some cases, the prices can rise and fall by several thousands of dollars within just a few days.
Experts believe that numerous reasons have assisted in influencing its volatility over the years. Understanding the factors that drive its prices will assist you in deciding whether it’s a worthy investment or not.
Factors that Affect Bitcoin’s Volatility
1. A Market Built That’s Heavily Reliant on Sentiment
Before proceeding any further, you should note that Bitcoin doesn’t hold any intrinsic value. Therefore, it’s impossible to use traditional valuation methods, e.g., discounted cash flows, to quantify it.
Additionally, while many people are quick to compare it to gold regarding its ‘stored value,’ Bitcoin doesn’t have a physical presence. Several Bitcoin use cases have emerged today, but experts still haven’t found a way to attach this value to its prices.
It’s what makes its movements highly susceptible to market narratives and investor sentiment. Sentiment can cause BTC prices to rocket at a whim or fall for no reason at all. The fact that it isn’t pegged to any tangible value means sentiment can significantly affect its prices.
2. Bitcoin Supply and Demand
Supply and demand are two factors that have a huge impact on the price of commodities, including cryptos. If you look at Bitcoin, experts believe that its market value rises or falls based on the total number of tokens in circulation and the number of people willing to buy them.
Its creator limited the number of available tokens to 21 million. The implication is that the closer the number of coins in circulation approaches this number, the higher its prices will rise. However, there’s no way of determining when this will happen.
Moreover, no one can predict what will likely happen once the Bitcoin holders attain this limit. While Bitcoin mining may cease being a profitable venture, the desire for big investors to increase their holdings means its prices will continue fluctuating.
3. Bitcoin Investor Actions
Bitcoin has remained the most popular crypto for over a decade. As its popularity soars, its supply continues to reduce. Many wealthy BTC investors prefer to hold their investments over the long term, ensuring that those with fewer assets don’t gain any meaningful exposure.
By the end of 2020, close to a third of all available BTCs were held by 10,000 top BTC investors, according to data from the National Bureau of Economic Research. Recently, financial institutions and brokers have been trying to seek approval for Bitcoin Backed Securities.
If the Securities and Exchange Commission agrees to grant approval, it means that the number of BTCs held by large investors and financial institutions will increase significantly. It’s a reality that will come about as the number of securities being designed increases.
Volatility Driven by Investors
Investors can, to a large extent, drive Bitcoin volatility. For example, it’s unclear how several Bitcoin whales can go about liquidating their holdings without affecting its prices. If two or more whales sold their holdings today, the prices would drop due to investor panic.
Crypto exchanges have tried to prevent this from happening by limiting the number of BTCs that a single holder can liquidate in a day. Many have placed the limit at $50,000 per day, meaning a whale can’t offload their assets fast enough to avoid a loss.
Now, if the prices continue to hover around the $50,000 mark, it will mean that a wealthy investor will only get a chance to liquidate one coin per day. It’s a scenario that would cause other investors to begin selling their assets, causing the prices to fall.
Volatility Driven by its Store of Value Belief
Another factor that affects its volatility is its method of value transfer and as a store of value. The latter refers to its ability to maintain value in the coming weeks with a certain degree of predictability.
Some investors believe that Bitcoin can retain its value in the long term, allowing it to continue growing. Those who hold this school of thought are convinced that they can use it as an alternative to traditional stores and as a hedge against inflation.
4. Bitcoin and Media Outlets
Given that news and media outlets need regular content for their viewers and readers, they tend to present unverified opinions and predictions from so-called experts. Many of these claims and opinions don’t have any accompanying evidence.
It’s not surprising to come across claims from individuals with extensive BTC holdings stating that the token may reach the $100,000 mark by year’s end. Some will also try to market newly released tokens to try to eat away at BTCs market share.
In most cases, all this publicity and media attention does is influence BTCs prices. The beneficiaries of this exposure are the large investors with millions of Bitcoins. Often, its prices will drop once the hype has cooled down.
5. Bitcoin Regulation or Its Lack of
Any rumor touching on Bitcoin regulation tends to affect its short-term prices. Nevertheless, experts are still trying to look at and debate the importance that such rumors have on its pricing.
It’s also worth noting that the views various governmental agencies have on crypto can and have affected Bitcoin pricing in the recent past. For example, the Internal Revenue Service states that Bitcoin is a convertible virtual asset.
The IRS further states that BTC is a capital asset because you can use it as an investment vehicle. For this reason, any person who mines BTCs should by law report the BTCs mined as income. They should report it based on its value on the day they mined it.
From the five points mentioned above, it’s clear that many factors cause Bitcoin’s volatility. They range from investor actions to regulation, supply, and demand, to investor sentiment and news and media outlet’s reporting.
But despite its volatility, Bitcoin remains a safe investment option for many crypto enthusiasts.
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