The prices of other tradable commodities like Gold, Silver, diamond, etc., also change from time to time, but not like bitcoin.
One can say that it is the high volatility in bitcoin that has made it more popular in the short period of its existence.
Bitcoin functions as a digital currency because it has some of the characteristics of the traditional currencies, and it follows its three basic rules of money, which are;
- It must serve as a medium of exchange
- It must be a scarce resources
- It must serve as a store of value
Bitcoin was introduced to be a deflationary currency with a limited supply of 21million.
At the time of writing, the circulating supply is 18.5million, according to coinmarketcap, with the price of 23,000 USD.
So, could it be that the volatility is high because the maximum amount of bitcoin that can be in circulation hasn’t been maxed out?
Before delving into why the current price of bitcoin has constantly been changing and causing high volatility, you must understand what volatility means.
Definition of Volatility
Volatility, according to Investopedia, is a statistical measure of dispersion. It represents how large an asset’s prices swing.
So in this context, it represents how massive bitcoin price USD increases or decreases within a given period.
The volatility of bitcoin is high, and the same thing applies to the like of gold, silver, and other cryptocurrencies.
There is this theory that the higher the volatility of an asset, the riskier it becomes, and the lower the volatility, the less risky it is.
Now that you know what volatility in bitcoin is, the next question should be how volatile bitcoin is.
How volatile is Bitcoin price?
To understand how volatile Bitcoin is, you must consider how much 1 BTC is worth now to what it was in 2010.
Bitcoin as of writing is over 23,000 USD, while it has at a particular time being less than 1 USD.
As of December 2017, it was well above 18,000 USD, very close to 20,000 USD, and then it fell to as low as 3,000 USD.
That tells you to an extent how volatile it is, so now, why is bitcoin so volatile, and what causes it to be so volatile.
Why is Bitcoin Volatile?
These are some of the reasons for the volatility of bitcoin:
1. Bitcoin is in its early stage
From its creation to date, Bitcoin is barely 12 years. It is in its growth and development stage, and its technology is also still developing.
People, organizations, and governments are still warming up to it.
Policies and regulations are just being put in place by some countries for its usage.
So it is still understandable that bitcoin price fluctuates.
The present market cap is less than $500 billion with the circulating supply of 18.5 million BTC.
For the price to be somehow stable at its early stage, it will be used to purchase goods and services, payment of debt and salaries, and other commercial purposes.
So, bitcoin prices will also increase when its adoption for commercial purposes increases and becomes more stable.
Some people are still not sure of bitcoin’s fate, probably because their country is yet to recognize it or people have not started adopting it in their area.
The bitcoin market has so much uncertainty, you can’t be sure if the price will go up or down, so basically, investors make speculations and bet on whether the bitcoin price will rise and fall.
They try to buy at a low price, hoping for it to rise so they can sell it and make a profit, and once they see that the price of bitcoin is going down, they sell it to avoid losses.
The fact that the current bitcoin price in usd isn’t predictable makes the volatility even higher, and the perceived value sways.
3. The Media
The media also plays a huge role in the volatility of bitcoin.
If the media release bad news about bitcoin, it will decrease the adoption rate, and more people will back out, causing the price to plummet.
When the media gives facts and good news about bitcoin, it will cause the price to rise and its adoption to increase.
The media can also determine whether the price goes up or down. Investors are constantly listening to the media to predict if the price will go up or fall.
The media can also create fear in people’s minds, which isn’t palatable for bitcoin prices.
If there is an increase in fear, there will be a decrease in the number of investors and a fall in the price.
4. Large Bitcoin holder risk
There are too many people holding bitcoin to the number of bitcoin in circulation.
Most of the people who hold bitcoin do not have an in-depth knowledge of what it is and how to go about it.
They only want to invest for some time and make money off it, thus using it as a bubble.
However, these sets of people are vulnerable to fear and doubt.
They only move where their emotions direct them, and when people with high profile start selling or buying BTC because of fear or doubt, it causes it to be extremely volatile.
5. Scams and security breach
Scams and security breach is another factor that causes volatility in Bitcoin.
When there is a scam or a breach in the security system, there will be a rise in fear, which in turn increases the volatility.
Many cryptocurrencies have made headlines for being hacked, which affects their prices.
Many cryptocurrency exchanges around the world have declared bankruptcy due to numerous hack attacks.
These are a few of the reasons why volatility in bitcoin is high.
The listed reasons can cause the price of bitcoin to rise and fall.
While Bitcoin is volatile, it has proven to be a safe haven than gold and other traditional commodities.
People are learning to invest wisely as they watch the bitcoin price soar higher