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Why Is Bitcoin Price Volatile?

Why Is Bitcoin Price Volatile?

  • 6 January 2022
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Bitcoin, which became available to the public in 2009, began its popularity around 2010 when the price of a token rose from a fraction of one dollar to $ 0.09. Since then, the price of bitcoin has risen by tens of thousands of dollars. Sometimes rising or falling by thousands of dollars in a matter of days.

There are several reasons why Bitcoin has such a volatile price history. Understanding the factors that affect its price in the market can help you decide whether to invest in it, trade it or keep an eye on its developments.

Why Is Bitcoin Price Volatile: Bitcoin Supply and Demand

Supply and demand influence the prices of most commodities more than any other factor. Bitcoin’s market value primarily affected by how many coins are in circulation. And how much people are willing to pay. By design, the cryptocurrency is limited to 21 million coins—the closer the circulating supply gets to this limit, the higher prices are likely to climb.

It is difficult to predict what will happen to prices when the limit is reached; there will no longer be any profit from mining BTC. As big financial players compete for ownership in an environment of dwindling supply, Bitcoin prices will likely fluctuate in response to any actions they take.

Bitcoin Investor Actions

As the most popular digital currency, the demand for bitcoin is increasing as supply becomes more limited. Long-term and wealthy investors hold their bitcoins and prevent fewer assets from being exposed. According to the National Bureau of Economic Research, one-third of all bitcoins were held by the top 10,000 investors by the end of 2020. As more securities are designed, the number held by large institutions and investors continues to increase.

Bitcoin fluctuations are also partly driven by these investors. It is unclear how Bitcoin Whales – investors with bitcoin reserves in the tens of millions or more – can turn their key positions into Fiat currency without affecting the Bitcoin market price. If the whales suddenly start selling their bitcoin assets, prices will plummet as other investors panic.

Most exchanges have limits on liquidity per day, in the range of about $ 50,000. Investors with thousands of bitcoins may not be able to cash in on their assets quickly enough to avoid huge losses. If the Bitcoin price is still around $ 50,000, a larger investor can only cash one coin a day. Other investors began to sell, and prices plummeted before anyone could sell them all for more than $ 50,000 in coins, leading to huge, rapid losses.

Bitcoin Investor Actions

Emerging technologies such as decentralized finance and metatarsals may reveal the viability of bitcoin in the market, but there is still speculation as to whether bitcoin has value or use in these systems.

Bitcoin fluctuations are also partly due to different beliefs about its usefulness as a store of value and value transfer methods. Value storage is a function of an asset that allows it to maintain value in the future with a degree of predictability. Many investors believe that bitcoin retains its value and continues to grow, using it as a cover against inflation. And as a replacement for traditional value stores such as gold or other metals.

Why Is Bitcoin Price Volatile: Bitcoin in the News

Because news and media outlets are businesses that need content for their readers and viewers, they often present information and predictions from “experts” that are not always verified by evidence other than opinions.

It’s not uncommon to hear an opinion from someone heavily invested in Bitcoin stating that the currency will soon be worth hundreds of thousands. Others hype newly invented cryptocurrencies to try and take away market share from Bitcoin. However, most of this media attention and publicity serves to influence Bitcoin price to benefit the people who hold large numbers of coins.

When media outlets announced Proshare’s introduction of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks. Investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange, causing a price jump to more than $69,000.

After the hype died down and investors realized the ETF linked to Bitcoin through futures contracts traded on the commodities market, prices dropped back down around $50,000.

Why Is Bitcoin Price Volatile: Bitcoin in the News

Why Is Bitcoin Price Volatile: Bitcoin Regulation

Rumors about the rules will affect the Bitcoin Price in the short term. But the significance of its effects will still analyze and debate.

Government agency views on digital currency can also affect the price of bitcoin. The Internal Revenue Service (IRS), for example, considers bitcoin a convertible virtual currency because you can convert it into cash. The IRS also considers bitcoin an asset if it is used as an investment instrument. In addition, if you are mining bitcoin, you must report it as revenue based on the market value of the coin at the date it is received.

The IRS tax position means that taxes must be paid when using bitcoin. As a result, taxes play a role in bitcoin market prices. But they do not necessarily contribute to fluctuations unless tax regulations change frequently and cause investor concern.

In 2021, the Chinese government and central bank declared that all transactions or facilities of digital currencies are illegal. Bitcoin cloud mining was suppressed after a meeting of the State Council’s Financial Stability and Development Committee in May, which led to widespread closures of digital currency mining farms in the country. Rumors of an attempt to end mining in the country had previously reduced prices – but after the announcement of the committee meeting in May, the price of bitcoin fell to about $ 29,700 by August 2021 as miners tried to relocate.

Why Is Bitcoin Price Volatile: Bitcoin Regulation

Why Is Bitcoin Price Volatile: Power of the media

Several reports have shown that the media has the greatest effect on the price of Bitcoin and other cryptocurrencies. The general public gains a greater understanding of cryptocurrencies and Bitcoin as a result of increased media attention. This can draw new users to cryptocurrencies.

When a crypto investor finds new knowledge in the media, he will immediately tell his friends, who will do the same. The news will spread like wildfire due to the power of social media. And the price of Bitcoin will affected.

Positive media coverage of Bitcoin will usually result in higher prices, while negative price coverage will have the inverse result.

Why Is Bitcoin Price Volatile: Bitcoin’s Competition

Bitcoin is without a doubt the most well-known and accepted cryptocurrency throughout the world. However, there are thousands of other cryptocurrencies vying for our consideration, such as Tether and Ethereum (ETH).

Although bitcoin remains the most valuable cryptocurrency in terms of market capitalization, altcoins such as Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT) are among its big competitors as of March 2021.

The market cap is also a factor that can influence the currency price in this ever-changing scenario.

Why Is Bitcoin Price Volatile: Bitcoin Mining

The bitcoin protocol allows for the creation of new bitcoins at a set rate. As miners process blocks of transactions, new bitcoins will add to the market. And the rate at which new coins will introduce will program to slow over time.

The amount of bitcoins that the system allows to exist can also affect supply. This number capped at 21 million, and once reached, mining operations will cease to produce new bitcoins.

Excavators are used by cryptocurrency miners to mine them (mining). This procedure becomes increasingly difficult. If the cost of mining virtual currencies rises, this would almost certainly affect the price.

Bitcoin Is Still in Its Infancy

As a means of exchange, gold has been used for a very long time. As such, it is a reasonably stable commodity, as far as price, demand, and supply go. Likewise, fiat currency has been around for some time. While exchange rates between countries fluctuate and are somewhat volatile, their values are to a point predictable based on the issuing country and the economic circumstances it faces.

Bitcoin has only been around for a short time—it is still in the price discovery phase. This means that prices will continue to change as investors work through the initial growing pains and concerns until prices stabilize. If a stable point can be reached.

Why Does BTC Fluctuate so Much?

Bitcoin’s price fluctuates because it is influenced by supply and demand, investor and user sentiments, government regulations, and media hype. All of these factors work together to create price volatility.

How High Can Bitcoin’s Price Go?

It’s rare to watch cryptocurrency news and not see an investor opinion of how high Bitcoin price will get. Unfortunately, it is unknown how high or low the cryptocurrency’s price will go.

Is Bitcoin Safe to Buy?

You can buy Bitcoin on government-approved cryptocurrency exchanges like Binance. If you’re looking to use Bitcoin to preserve capital or grow your assets, its price is highly volatile. There is no guarantee that you will see any returns; you’re just as likely to lose everything you invest as you are to make any gains.

Conclusion

Before engaging in Bitcoin currency transactions, all investors must consider all of the above considerations. Knowing both of these aspects before entering the cryptocurrency market will help you increase your long-term income.

There may be a variety of other factors that affect the price of bitcoins, such as manipulations by major players. The ones listed above, on the other hand, are the most noticeable.

One response to “Why Is Bitcoin Price Volatile?”

  1. Yanga Jili says:

    Great article indeed with some interesting information

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