What makes Bitcoin so volatile?
Traders are always concerned about the volatility of ‘Bitcoin’. It is important to know what makes the value of this particular digital currency highly unstable. Like many other things, the value of ‘Bitcoin’ also depends on the rules of supply and demand. If the demand for ‘Bitcoin’ increases, the price will also increase. Conversely, decreased demand for ‘Bitcoin’ will lead to decreased demand. In simple words, we can say that the price is determined by the amount that is agreed to pay in the commercial market. If a large number of people want to buy ‘Bitcoin’, the price will increase. If more people want to sell ‘Bitcoin’, then the price will go down.
It is worth knowing that the value of ‘Bitcoin’ can be volatile when compared to more established commodities and currencies. This fact can be attributed to its comparatively small market size, which means that a smaller amount of money can change the price of ‘Bitcoin’ more prominently. This inconsistency will naturally reduce over time as the coin develops and the size of the market grows.
After being teased at the end of 2016, ‘Bitcoin’ hit a new record high in the first week of the current year. There could be several factors that cause ‘Bitcoin’ to be volatile. Some of these are discussed here.
The bad press factor
‘Bitcoin’ users are mostly scared by different news events including statements by government officials and geopolitical events that ‘Bitcoin’ may possibly be regulated. It means that the adoption rate of ‘Bitcoin’ is concerned by negative or bad press reports. Various bad news caused fear among investors and prohibited them from investing in this digital currency. An example of front-page bad news is the eminent use of ‘Bitcoin’ in the processing of drug transactions via the Silk Road, which ended with the FBI’s arrest of the market in October 2013. These types of stories produced panic among the people and caused ‘Bitcoin’ value to greatly decrease. On the other hand, trading industry veterans saw these negative incidents as evidence that the ‘Bitcoin’ industry is maturing. Then ‘Bitcoin’ began to rise in value shortly after the bad press wore off.
Fluctuations in Perceived Value
Another big reason for the value of ‘Bitcoin’ to become volatile is the fluctuation of the perceived value of ‘Bitcoin’. You may know that this digital currency has similar properties to gold. This is governed by a design decision by the creators of the core technology to restrict its production to a static amount, 21 million BTC. Due to this factor, investors may allocate fewer or more assets to ‘Bitcoin’.
Security Breach News
Several news agencies and digital media play an important role in the construction of a negative or positive public concept. If you see something advertised to your advantage, chances are you’ll opt for it without paying much attention to the negatives. There have been news about ‘Bitcoin’ security breaches and it really made investors think twice before investing their hard earned money in ‘Bitcoin’ trading. They become too susceptible to picking any specific ‘Bitcoin’ investment platform. ‘Bitcoin’ can become volatile when the ‘Bitcoin’ community discovers security sensibilities in an effort to create a large open source response in the form of security solutions. Such security concerns give rise to various open source programs such as Linux. Therefore, it is advisable for ‘Bitcoin’ developers to expose security vulnerabilities to the general public in order to create robust solutions.
The latest ‘OpenSSL’ weaknesses attacked by the ‘Heartbleed’ bug and reported by Neel Mehta (Google Security Team Member) on April 1, 2014 seem to have some downward effect on the value of ‘Bitcoin’. According to some reports, the value of ‘Bitcoin’ decreased by as much as 10% in the following month compared to the US dollar.
Small Option Value for Large ‘Bitcoin’ Holders
The volatility of ‘Bitcoin’ also depends on ‘Bitcoin’ holders holding large proportions of this digital currency. It is not clear to ‘Bitcoin’ investors (with current holdings of more than $10 million) how they would liquidate a position that expands to a fiat position without moving the market severely. Thus, ‘Bitcoin’ has not touched the mass market adoption rates that would be important in giving option value to large ‘Bitcoin’ holders.
Effects of Mt Gox
The recent high-profile damage to ‘Mt Gox’ is another big reason for ‘Bitcoin’s’ volatility. All these losses and the resulting news of heavy losses had a double effect on instability. You may not be aware that this reduced the overall ‘Bitcoin’ float by almost 5%. This also created a potential increase in the residual value of ‘Bitcoin’ due to the increased scarcity. Superseding this momentum, however, was the negative outcome of the news series that followed. In particular, many other ‘Bitcoin’ gateways saw the big failure at Mt Gox as somewhat optimistic for ‘Bitcoin’s’ long-term prospects.