Why the Price of Bitcoin is So Volatile?
With the world racing toward more and more digitization, it would make sense for money to do the same — with cryptocurrency being the end result. But for some reason, and for all of its introduction while back, the same hasn’t seemed to garner drop support, and for most people, it’s just been the “crypto bros” and a few risk-friendly people experimenting with it.
Most people view the price of Bitcoin as still up in the air and is something extremely volatile. So today, let us take you through Bitcoin and its volatility.
The Nature of Supply and Demand
First thing first, the primary reason why Bitcoin price is volatile is the supply vs demand of Bitcoin itself. Supply is a major factor as Bitcoin itself is a digital asset and a deflationary asset that has a fixed capped amount of only 21 million. Thus, if there comes a time when the supply gets lesser and there’s demand for the ownership of it, then it is only logical that the price needs to be raised.
Media Influence and Market Sentiment
Even media and news play a role in the crypto space as well. Just a simple tweet by Elon Musk on Bitcoin is able to change the price of the cryptocurrency in a few seconds. If the news, or in general, has a positive sentiment from the people, then it will lead to Bitcoin going up and vice versa.
The Role of Speculators and Investors
Bitcoin was built as a currency for “the people.” The middleman was meant to be removed. However, Bitcoin has become a commodity traded by both retail traders and institutional traders. When more users enter into any arena, speculation becomes part of the deal (or game). Most traders in Bitcoin now are not looking to be investors for the long run; rather, they are looking for a “get-rich-quick” scenario, with the day trading and haggling over pennies most of the time.
In this context, the more users speculate, the larger the price movement, especially if leverage comes into play. The Bitcoin market on Binance is literally through the roof.
Regulatory Developments
Blockchain regulation is a very fluid aspect. Digital currency, be it Bitcoin or others, is very new, and almost all developed countries that are trying to assimilate such currencies into their economy have no clue as to how to go about it. This creates a lot of volatility. Any country making new regulations can destroy or cripple demand, thus resulting in major drops in prices in a short duration of time.
Technological Innovations and Market Infrastructure
The infrastructure supporting blockchain markets is in flux. New technology is being created (e.g., the Lightning Network) that enables faster confirmation/settlement of transactions. More people can generally use the technology if it all works as intended. More users = less volatility as bitcoin is meaningfully integrated into the financial system; more stability over time with the potential of explosive price increases.
But if something doesn’t work as intended or systems are compromised – boom! The prices become bust!
Get Trading
As Bitcoin is increasingly integrated into the global economy, being aware of these things will help you navigate the crypto waters. If you know what influences the price of Bitcoin, you can better frame your decision-making in the arguably wildest market space available.