Why are Bitcoins So Volatile? Learn More Before Investing

Historically speaking, Bitcoin’s value has always been pretty volatile. Experts believe there are quite a few reasons for the same. Find out what these reasons are before you invest in Bitcoins.

The world’s most popular cryptocurrency – Bitcoin – was first released in 2009. Although the exact developer or the team is unknown, an anonymous developer who goes by the name of Satoshi Nakamoto is credited for the same.

The currency, within a few years of its launch, earned colossal popularity. And today, it is considered amongst one of the most valuable assets for capital investment.

It has become so popular that it is often regarded as the top-rated cryptocurrency in the world. More so, today, we can even find a Bitcoin ATM to buy or sell Bitcoins. It has become convenient to trade in Bitcoins.

Obviously, you’re also interested in investing your money in Bitcoin. Why else would you be reading this article, right?

Nonetheless, if you’re already familiar with the currency and how it operates, there should be a pinning question bothering you.

Why is Bitcoin so volatile?

Technically speaking, many factors govern Bitcoin’s value in the mint market.

Can we measure volatility?

The answer is Yes!

Although the spot rate for cryptocurrencies varies on many factors, we can measure their volatility.

It is generally measured as a volatility index, which is also used in traditional markets. However, to your surprise, particularly for Bitcoins, a volatility index exists.

Known as the Bitcoin volatility index, the score tracks the currency’s spot rate at a given time. Cumulatively the data provides a responsive idea of how the market behaviour tends to change.

But, what exactly are the factors responsible for such high volatility of bitcoin’s value?

We’ve repeatedly been telling you that many factors govern the price of Bitcoin.

It is worth mentioning here that apart from mining rate and units in trade, which you might already be aware of, there are other factors at play too.

In brief, these factors are:

Perceived value
Market news
Future uncertainty
Bear vs. Bull behaviour
Currency inflation

Let’s understand how each of these factors affects Bitcoin’s value in the fiat market.

The perceived value concept

One of the reasons why Bitcoin’s value may fluctuate is its perceived value.

Bitcoin has similar properties as that of gold. Meaning, the number of bitcoins that can be mined is limited (21 million BTC).

Since most economies in the world are built around fiat currencies, it causes a loss of interest for the user. Investors may allocate their capital depending upon their interests.

For example, more mining of the bitcoins leads to halving, and we all know that. Halving is quite similar to the inflation principle that we observe in fiat currencies.

As a result, the economists may or may not invest their capital in Bitcoin.

The bad and the good news

If you’ve been following up with the crypto world or Bitcoins, in particular, you may remember a recent ripple in Bitcoin’s value.

Nonetheless, here it is – a couple of weeks ago, Elon Musk tweeted that Tesla won’t accept Bitcoins. This tweet came after he commented on Bitcoin not being eco-friendly.

Within a few hours of his tweets, Bitcoin’s value dropped more than 30%.

That’s a steep dip in its value since the last halving in May 2020.

A few days later, another tweet from Elon Musk eloped Bitcoin’s value once again. Moreover, this crest in Bitcoin’s value actually raised Tesla’s holdings by $143 million.

That’s astonishing how a single tweet from large holders can affect its value.

It is perceived that any news in the market about Bitcoins affects its trading, which in turn impacts its value.

The uncertainty of its future value

One of the many reasons for its high volatility is also the fact that it has historically been volatile.

What we’re trying to tell you is that Bitcoins are uncertain. They may drop or rise within minutes and not even hours.

This, as a result, creates a lurking uncertainty for investors and Bitcoin buyers.

It needs no mention that when there are no buyers, there’s no need for sellers, and this creates a massive gap in the supply chain. Thus, affecting Bitcoin’s value in the long run.

The bear and the bull concept

Like traditional currency exchange, the crypto market also has a bull and a bear.

Large holders of Bitcoins are known as bull since they get to increase their value in trade.

On the contrary, a bear is someone who pulls Bitcoin’s value down by dumping all his equity.

The concept of bear and bull is quite common in the trading world. And it governs the volatility of Bitcoin too.

The inflation in fiat currencies

As for most Bitcoin investors, this might be a tough nut to crack, but we’ll give it a try.

Consider this case scenario.

Let’s assume that 1 BTC values for 100 USD. Since the US is a developed nation, the chances of fiat currency inflation are not as high as they would be for a developing country like India.

When an investor from India buys BTC in USD, they may first need to buy USD, which would mean an additional exchange cost. Meanwhile, if INR inflates, the price for BTC would increase for the investor.

As a result, the value of Bitcoin would vary from region to region. Thus, creating an unpredictable investment prospect for investors.

To sum it up…

Bitcoins, as most of us know, is a decentralized digital currency. It does not involve any banking system but instead relies on peer to peer chain.

For controlling the volatility of Bitcoins, there is a need for a better understanding of the asset. Only then can we assume that Bitcoin’s value won’t fluctuate too much.

Until then, the high volatility of Bitcoins would remain unresolved.

On this note, we hope that this article has helped you understand some of the critical features of Bitcoin. Let us know your thoughts in the comments section below.

Thanks for reading, please let me know your thoughts and comments below.