Reasons Why Bitcoin is Volatile

One the quality of a good crypto trader is the ability to recognise when a cryptocurrency is about to rise or plummet. For investors likewise, knowing when to put your money into cryptocurrency trading is the beginning of success and huge earnings. Bitcoin, being the pioneer cryptocurrency, has gained massive popularity in the years following its inception in 2009. Since then, it has exhibited a very unique trend in terms of price fluctuations. This has led to many asking why Bitcoin is volatile compared to other cryptocurrencies.

Studying the trend of Bitcoin’s rise and fall, we have put together some theories that explains the reason behind Bitcoin’s volatility. In this article, we will be exploring the various factors that explain why Bitcoin is volatile. Understanding these factors is crucial for investors and traders that are seeking to explore this complex market. Let’s get started.

What is volatility?

In crypto, volatility is the rapid, often unpredictable, fluctuations in the price of an asset that occurs frequently. It is a measure of how much the price of an asset has increased or decreased over a period of time, for a set of returns. As a rule of thumb, the more volatile an asset is, the riskier it is to invest in it.

5 reasons why Bitcoin is volatile

Digital assets like Bitcoin are highly volatile especially when you look at its price fluctuations from inception to date. Here are 5 reasons why Bitcoin is volatile.

Supply and demand

Supply and demand for cryptocurrency is an important factor that determines the price of any coin. It is more so with Bitcoin.

The amount of Bitcoins in circulation and the amount people are willing to pay creates the demand or supply. Increased demand from big investors increases the price of Bitcoin while decreased demand can lead to price drops.

Additionally, the supply of Bitcoin is capped at 21 million. This creates scarcity and encourages price increase. Although, when supply increases due to mining rewards or holders selling their coins, prices may decline. For example, in 2018 increased supply from ICO sell-offs decreased the price of Bitcoin. On the other hand, some time during the COVID pandemic in 2020, the need for safety nets assets and limited supply led to an increase in the price.

Small market capitalization

Market capitalization is a measure of how much the total supply of an asset is worth. In comparison to other stable assets, like gold, Bitcoin has not been around very long, therefore it has a relatively low market cap. To get a better picture, the market cap of Bitcoin is approximately $1trillion. This is only 10% of the market cap of gold.

Assets with a small market cap can easily be controlled in the market by a shareholder. Such assets need a small capital to have a bigger effect on the market. Therefore individuals or groups with large amounts of that asset control the market.
If an individual with a large amount of Bitcoin sells it, there would be a massive increase in the amount of Bitcoin in circulation which increases supply and reduces the price. In comparison, the same amount in gold will not have such a drastic effect on the market value of gold.

Bitcoin regulations

Despite the worldwide attention given to cryptocurrency, there are regulations in some countries that affect its use. Speculations about government regulations affect the price of Bitcoin for a short period of time. Regulations that favor Bitcoin’s use and adoption increase the price and vice versa.

In 2021, the Chinese government banned all transactions that involved cryptocurrency. Due to this, mining farms shut down and coin holders began to sell their assets in panic. This caused the price of Bitcoin to drop. Contrarily, in the US pro-crypto governments create regulations that favor cryptocurrencies, increasing the price of Bitcoin.

Uncertain regulatory conditions make Bitcoin highly volatile, regulatory clarity is essential for the stability of the price of Bitcoin.

Rumors and speculations

Speculations from investors and experts is one of the reasons why Bitcoin is volatile. The emotions of investors and market sentiment can drive the price of Bitcoin up or down. When investors are positive about the potential of Bitcoin, the price increases. However, when the market has a negative sentiment, the price declines.

In the days leading to the US presidential elections, rumors and speculations suggesting Donald Trump emerging as the winner drove the price of Bitcoin to a record high. This was as a result of the President-elect’s pro-crypto promises, thus favoring the price of Bitcoin.

Bitcoin is still growing

Bitcoin was introduced in 2009, but started gaining popularity in 2010. Other assets such as traditional finance and gold have been around for much longer than Bitcoin. As such, they have been established and accepted worldwide leading to a much more stable price of these assets.

Because Bitcoin is in its infancy, there is still a lot of doubt from investors concerning its future. Also, governments of the world are still navigating how the adoption of Bitcoin will affect their nation’s economy. The back-and-forth creates fluctuations in the price contributing to why Bitcoin is volatile.

Navigating the volatility of Bitcoin with Openfabric

Bitcoin still remains one of the biggest cryptocurrencies in the world despite its high volatility. Navigating the market with this high volatility is very risky unless traders have access to the right information and tools to help them. One of such tools is the Openfabric Trading Bot.

This AI tool analyzes trends and market sentiments to give you, the trader, insights on what trade to make. It is basically an assistant to trading that doesn’t stop working even when you do. This way you are fully maximizing your opportunity.
However, it is important to note that this tool is not a guarantee to a successful trade. You still need to analyze your market and amplify your result with the Openfabric Trading Bot for a much better outcome.

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Conclusion

The volatility of Bitcoin is not caused by a single factor. It is caused by an interplay of various factors. Therefore, there is a need for informed decision-making before any trade is initiated. Investors and traders must recognise these factors and understand them to make the most even with the unpredictable fluctuations.

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Frequently Asked Questions

Question: Is the volatility of Bitcoin unique to cryptocurrency?
Answer: No, volatility is not unique to cryptocurrency. Other assets, such as stocks and gold, can also experience significant price fluctuations. However, they have more stable and predictable price fluctuations than Bitcoin.
Question: How can investors reduce the effects of Bitcoin’s volatility?
Answer: They can do this by diversifying their investments, setting clear investment goals, and staying informed..
Question: Will the volatility of Bitcoin decrease over time?
Answer: As the cryptocurrency market matures and regulatory clarity improves, volatility may decrease. However, it is not possible to accurately make this prediction.
Question: What are some reliable sources for tracking Bitcoin’s price?
Answer: Reliable sources include Coinbase, Coindesk, and CoinMarketCap.