What are the factors for the volatility of bitcoin?

Since its launch in January 2009, Bitcoin’s volatile nature has resulted in massive fluctuations in the crypto market. Recently, tools to measure the volatility of Bitcoin and other cryptocurrencies have been introduced, the most popular being Bitcoin Volatility Index.

Here, we will discuss the potential factors that cause such high volatility.

Read all about what is bitcoin?

Bitcoin is a new concept:

All new concepts take time to be accepted. People have been using fiat currency for a very long time so to accept an intangible digital currency was difficult to start with. When Bitcoin was launched in 2009, it received a lukewarm reception. The primary reason is that people simply could not grasp the meaning of cryptocurrency. Even financial experts were apprehensive about its longevity.

When the genesis block of the blockchain network was launched, users started mining bitcoin and earning coins as reward. The cryptocurrency had no value then. It was only in February 2011 that Bitcoin finally attained the $1 price. It took some time before investors started showing interest in it. Today, Bitcoin enjoys massive popularity and a bitcoin costs more than $ 62,000.

 

Decentralized network & lack of a controlling agency:

No central authority, institution, or government exists that can intervene in the Bitcoin market or any other crypto-market. Thus, no regulatory body can step in and prop up markets in the event of a slump and control the volatility as it is usually seen in the traditional stock market. Also, in the absence of any regulations or guidelines, there is a clear lack of clarity in the mind of the investors. Of late, many platforms like online apps have come up that offer their services to the investors and guide them in the kind of investment to make and how they stand to gain even in the most volatile phase of the crypto-market. One such reliable app that has earned the trust of Bitcoin investors by providing them with precise trading inputs with the help of its advanced algorithms is the bitcoin champion app.

The finite number of bitcoins:

Bitcoin is a digital currency. Its price is solely decided by the laws of supply and demand. The total number of Bitcoins that can be mined has been capped at 21 million. Around 90% of Bitcoins have already been mined. Keeping in mind, Bitcoin is available in limited numbers, and people having Bitcoin will get a high return in the future because the availability of Bitcoin will be decreased over time.

Speculation:

Bitcoin trading depends a great deal on speculation. The young generation is drawn to Bitcoin for this very reason. They invest in the hope to earn quick money and their investments are mostly based on speculation. These wagers can cause a sudden inflow or outflow of currency. But when these investors do not make quick gains, they tend to lose interest and eventually quit.  This also leads to high volatility.

Political turmoil:

When national currencies are affected because of political unrest, people convert large amounts of money to bitcoin that are unaffected by the political situation. This sudden influx of currency in the market causes Bitcoin prices to fluctuate and cause volatility. Two major instances support this viewpoint.

During Brexit, the value of the British Pound slumped by 10% whereas there was a surge of over 65% in the Bitcoin price, in the same time period.

Following the election of Donald Trump as president of the United States in 2017, there was a sharp rise in the price of Bitcoins reflecting the uncertainty in the U.S economy.

But, Bitcoin is not a fiat currency and it is not issued or monitored by any government. Fiat money or currency can be controlled by the government and it is the main reason for financial inflation. Bitcoin can prevent such issues, and the price of Bitcoin has been dropped during the above political events because of the rumours spread about Bitcoin across the world.

CONCLUSION

Read all about the legality of bitcoin in Nigeria

Volatility can be perceived both as an advantage as well as disadvantage for Bitcoin market. Advantage because this volatility attracts hordes of short-term investors who want to make it big in a very short time. But its volatility is a matter of concern because investors still are hesitant in taking that big leap and continue to consider Bitcoin as an added feature to their financial portfolio.

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