What Makes Bitcoin so Volatile?

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Bitcoin is the first decentralized digital currency. It is a peer-to-peer payment system that allows for near instantaneous transactions without any need for third-party transaction processing.

According to microbtwhatsminerd1, what makes Bitcoin even more unique is that the blockchain technology behind it is completely decentralized and self-regulating. In other words, there is no central authority that regulates Bitcoins.

This has given rise to a new type of currency that can be used for purchasing goods as well as making transfers within a short period of time. What makes Bitcoin so volatile in terms of value lies in the fact that unlike traditional currencies, no government or any regulatory body monitors its price movements. For this reason, if supply goes up then demand decreases and the price will also fall down accordingly.

On the contrary, if demand gets higher because investors are attracted towards bitcoins then prices will increase further until supply catches up with it, at which point prices will stabilize temporarily intermediaries such as banks or credit card companies. Bitcoin generates more than $200 million worth of economic activity per day and has attracted many investors to its volatile market. There are multiple reasons why Bitcoin’s value fluctuates so wildly.

What makes Bitcoin so volatile? This article will explore some of the factors that have led to bitcoin’s volatility over time, while also looking at what this means in terms of bitcoins’ usefulness as a medium of exchange against other currencies like the U.S dollar and euro.

Main reasons why bitcoin is so volatile:

Source: Medium

Reason 1: The fact that its price cannot be predicted due to the lack of external factors affecting it.

What percentage of the total market capitalization for cryptocurrencies (aka “altcoins”) do bitcoins represent right now, and how has that changed over time? What if anything does this tell us about the future value of BTC? What makes Bitcoin so volatile In November 2012, a journalist from Forbes named Kashmir Hill embarked on an experiment in which she bought $100 worth of bitcoins every day using her credit card, in order to see what would happen when the price inevitably rose and fell over time.

What made this unique was that it was the first time the press was interested in writing about bitcoin, and Forbes is a well-respected news website that most of the upper echelons of society would read. What she wrote changed everything for all involved when it came to Bitcoin. What made one bitcoin worth $13 before her article was published climbed up to almost $989 just two years later! This also helped propel bitcoins’ value into the stratosphere were people like Cameron Winklevoss, who started buying bitcoins back in 2012 after reading Kashmir Hill’s article on Forbes.

Source: Pensacola Voice

Reason 2: investor’s perception of Bitcoins’ value.

Bitcoin is not governed by any central authority, unlike most traditional currencies which exist in a country or a group of countries with central banks as their regulatory authorities. What that means is that there is no one who can affect the currency’s volatility in any way apart from pure market forces and demand-supply dynamics. Bitcoin price is undervalued, they will buy it which means the value of 1 BTC would go up.

Let us look at a very simple example to understand why this can be beneficial to some and harmful to others. What if any external factors affecting the BTC price; let’s say for instance a war in one part of the world or a natural disaster struck somewhere, like an earthquake or tsunami. What if OPEC (Organization of Petroleum Exporting Countries) decided not to sell oil anymore because of strained relations with western countries? Or a country bans Cropto_currency. In these cases, the prices will badly go down. If someone has bought BTC at high rates and due to one of these external factors the price of BTC will go down which means the person will be at loss.

Bitcoin has the largest market capitalization of all cryptocurrencies (about 41% at this moment). What makes it interesting to take into account other crypto’s prices when considering whether or not to invest in Bitcoin or any other cryptocurrency is the fact that exchanges usually offer you to buy or sell BTC in exchange for any other cryptocurrency, be it Ethereum, Litecoin…

Source: Enterprise Podcast Network

Reason 3: The lack of traditional markets due to low liquidity and high volatility:

The volume of bitcoins traded on a daily basis is nowhere near the level traditional commodities (such as crude oil) are traded. There was never a time when oil prices rose this much. There were also no times when its value dropped by 20% within 5 days.

Source: unsplash.com

Reason 4: What makes Bitcoin so volatile can be both positive and negative at the same time.

It’s a combination of factors that cannot be predicted or avoided, which means that you can turn a profit on your investment but also lose everything if things go wrong. One of the main reasons for this is that there are only 21 million bitcoins to be mined. What about other cryptocurrencies? The total supply of all other altcoins in circulation currently reaches well over 500,000! What does that mean? A supply-demand imbalance [the demand for crypto exceeds its limited supply], and questions like how much will there be left after mining, do not seem to matter anymore.

Source: Medium

Reason 5: What makes Bitcoin so volatile is related to its popularity.

Bitcoin is the most popular cryptocurrency, which means that it has a huge following and you are not alone. What makes Bitcoin so volatile at the same time is its popularity as well. What does that mean? A price surge can be triggered by an event linked to the currency (yes, another war in a country rich in oil could set back prices) But also due to investment funds [like hedge funds] buying them, or even fake news published on social media! What if someone would like to boost the value of his own bitcoins? What if he wants to sabotage the global economy… Who knows what evil lurks inside people’s hearts? The good news is that you have your say too when deciding how valuable your bitcoins will be.