By Tofiq Aliyev
On Nov 02, 2020
Bitcoin’s price is famous for its volatile nature. There are numerous factors to explain why the price of bitcoin (BTC) is so volatile. In this blog, we will highlight some of these factors that influence the volatility of leading cryptocurrency.
Before getting started, let’s clarify the meaning of volatility for those who don’t know. Volatility is a statistical parameter for price fluctuations of a particular asset in a certain period (day, month, week, year). It is the volatility that makes it possible to make predictions and rates, taking into account previous fluctuations in value. Volatility is measured in traditional markets by the Volatility Index, also known as the CBOE Volatility Index. There is also a volatility index for Bitcoin. Known as the Bitcoin Volatility Index, it aims to track the volatility of the world’s leading digital currency by market cap over various periods.
Today, many people believe that blockchain technology will revolutionize the world. Being the first and most powerful currency of this system, Bitcoin has ingeniously designed features. In addition to being secure and decentralized, Bitcoin is also known for its volatile nature. Since its introduction in 2009, Bitcoin’s value has always been highly unstable. In 2017, Bitcoin’s value suddenly surged to $ 20,000 from just $ 1,000. This case has a place to remember in Bitcoin history. Because Bitcoin first achieved global popularity at this point. However, soon after, the price dropped rapidly to around $ 13,000 by the end of the year. This situation once again revealed the volatile nature of Bitcoin.
Here are some of the many factors behind Bitcoin’s volatility:
One of the fundamental laws of the economy is the concept of supply and demand. The more rare something is, and the higher its demand, the higher the price.
The total number of bitcoins in circulation is predetermined. 21 million. For now, there are under 2.5 million BTC left for mining. Once all are mined, no new Bitcoins will enter circulation. Recently, with the increasing popularity of cryptocurrencies, scarcity seems to have an impact on price. The latest Bitcoin is expected to be released by 2040. Therefore, as this year approaches, Bitcoin becomes more attractive to investors. Economists know it better than the Bitcoin supply will fix after 2040. No new Bitcoin. This limited supply algorithm causes a rapid rise in demand and a similar increase in price. As a consequence, all these predictions provoke everyone to own at least one Bitcoin.
One of the influential factors that can cause volatility in Bitcoin prices is news events. It doesn’t matter whether it’s good or bad. News and rumors can cause a sudden price fluctuation of the leading cryptocurrency in a short time. Since Bitcoin is still an evolving technology, news about it is spreading rapidly with the power of social networks. Usually, investors’ views and, especially, their actions can have a significant influence on this digital currency. For example, recent bitcoin acquisitions by major companies such as MicroStrategy and Square Inc in 2020 have been a major factor in the rapid price increase. In other words, when a positive announcement shared by popular investors about Bitcoin or any other virtual currency reaches the masses, it can cause its price to skyrocket. As good news comes one after another and supports each other, positive sentiments cause the price to rise.
Frequently shared opinions of investors are a signal of the maturation of the market in some way. Just as good news gets people excited, bad news causes them to be pessimistic about Bitcoin. The adoption of Bitcoin hampered by negative announcements in the newspapers. The bankruptcy of Mt.Gox in early 2014 was one of the events that negatively affected the Bitcoin price. Immediately after the news was announced, Bitcoin’s price fell more than 20% rapidly.
Another main driver behind Bitcoin volatility is regulation. This is because of the fear that cryptocurrency holders might lose their assets due to a government ban. This idea causes crypto holders to want to sell fast in order not to lose their wealth. Since its inception, several governments have made efforts to regulate bitcoin and other cryptocurrencies. In particular, two events that we will mention now highlight the impact of regulation on price.
In 2017, the Chinese government banned the Initial Coin Offers (ICOs) which, are offerings of digital tokens. This situation caused the value of Bitcoin to decrease rapidly within 24 hours. On the contrary, the announcement that Bitcoin would be accepted as legal tender in Japan increased Bitcoin’s price by 2% in just 24 hours.
Despite other things, clear, concise, and empowering regulations provide security to potential investors. Because they believe that governments keep an eye on money laundering and other fraudulent activities that may be related to Bitcoin.
It is important to note that the majority of Bitcoin in the world belongs to a small group of people. When these people decide to make certain transactions, they can suddenly decrease or increase prices. The term bitcoin whale is used for individuals or organizations holding such large amounts of bitcoin. By launching large amounts of Bitcoin at any given time, whales can completely destabilize the value of the leading cryptocurrency.
Additionally, most bitcoin whales hold a large portion of their bitcoins in private investment funds. This, in turn, leads to bitcoin scarcity by keeping some of the bitcoins out of circulation. Increased demand for a limited supply of bitcoins consequently causes a price increase.
For more information on how bitcoin whales affect the market, you can read our blog.
As a result, the bitcoin price can vary depending on factors that all other traditional currencies can be affected by. Even though Bitcoin’s current volatility makes it an uncertain store of value, it promises a direct transfer of value from one user to another. Therefore, all these factors must be taken into consideration before investing.