Bitcoin’s volatility explains recent occurrences in the cryptocurrency market
- A significant portion of Bitcoin’s volatility hinges on market speculation regarding price changes owing to the rapid adoption by investors and traders alike.
- Investors’ fears emanate from media sources, influencers, outspoken industry bigwigs, and famous cryptocurrency supporters.
- Supply and demand have a significant role in the price of Bitcoin, as they do for any other commodity or asset.
A brief history of Bitcoin
Bitcoin dates back to 2009, during the economic downturn. The creator of Bitcoin had designed it as a digital peer-to-peer currency system. However, Bitcoin has attracted crypto-curious investors as a gold-like store of value.
Among the millions of digital assets produced since it became the first cryptocurrency, Bitcoin remains the most valuable and widely used. Its popularity and value have increased steadily, but with some fluctuations.
In 2010, the price of a Bitcoin token went from fractions of a dollar to $0.09. This development marked the beginning of Bitcoin’s ascent in popularity. Since then, its price has risen by tens of thousands, sometimes fluctuating by thousands of dollars within days.
In April 2021, Bitcoin’s price surpassed $60,000, marking a new milestone and coinciding with the IPO of cryptocurrency exchange Coinbase. Since reaching $20,000 for the first time in December 2020, the peak heralded a rapid surge in the early months of 2021.
Bitcoin’s volatility explains the recent slump
Digital assets have recently suffered some of the same economic challenges that have afflicted the global economy and stock markets. Concerns about growing inflation and the subsequent hikes in interest rates by central banks have weighed on Bitcoin and other cryptocurrencies. These effects make riskier assets less appealing to investors. As a result, as stock markets fall, so do crypto assets.
The crypto market has remained under particularly intense strain as the rush for returns fueled by significant stimulus measures by central banks and governments during the height of the epidemic quickly reverses. As a result, the price of Bitcoin has fallen below the critical $20,000 level for the first time since November 2020, possibly unleashing a new wave of selling and sparking a crisis in the digital asset market.
Bitcoin, the largest cryptocurrency, stands as a benchmark for the larger crypto market. The price of Bitcoin fell to around $18,000 in mid-June, a drop of approximately 14 per cent. The price fell below the apex of the previous bull run in crypto markets in 2017, wiping out years of profits for long-term holders.
Recently, investors and executives have closely monitored the price of Bitcoin. Industry participants worry that the latest dip below $20,000 may trigger forced liquidations of highly leveraged market bets. The liquidation places extra pressure on the price and exacerbates the credit crisis that has already hit significant crypto lenders and dealers.
Regulators and other government organizations also remain keen on how things unfold. According to Harry Eddis, global co-head of fintech at Linklaters, recent occurrences in the crypto-asset market will increase authorities’ resolve to rein in the industry.
The recent occurrences in the cryptocurrency market demonstrate Bitcoin’s volatility remains the digital asset’s most common characteristic. Since its inception, Bitcoin has often fluctuated by thousands of dollars, sometimes within days.
Various reasons explain why Bitcoin’s price history remained so unpredictable. Understanding the elements that impact the Bitcoin market price might help one determine whether to invest, trade, or continue to monitor the evolution of the digital currency.
Bitcoin’s teething problems
Gold has acted as a medium of trade for a very long time. As such, gold remains a relatively constant commodity in terms of price, demand, and supply. Similarly, while exchange rates between nations vary moderately, their values are generally predictable. However, the variation depends on the issuing country and the economic circumstances it confronts.
Bitcoin has only been around for a short time and is still in the process of price discovery. The infant market is primarily to blame for bitcoin’s volatility. Traders are highly vulnerable to emotion, fear, and greed, leading to these dramatic market reactions.
The vulnerability implies that prices fluctuate as investors, consumers, and governments work through the first growth pains and worries until prices stabilize. In this aspect, the assumption is that a stable equilibrium remains feasible.
Regulation challenges impact Bitcoin’s performance in the crypto market
Regulation rumours have a short-term influence on Bitcoin’s price. The perspectives of government agencies on cryptocurrencies can have an impact on Bitcoin’s volatility. Some government authorities, for example, consider Bitcoin convertible virtual money for the ability to convert to fiat currency.
Other governments consider Bitcoin a capital asset if utilized as an investment instrument. Furthermore, if people mine a Bitcoin, they must record it as income according to the coin’s market value on the day it is received.
In 2021, China’s administration and central bank declared that all crypto transactions and facilitation stood prohibited. Following discussions by the State Council Financial Stability and Development Committee in May, a massive closure of cryptocurrency mining farms in the country happened.
Rumours of a movement to eliminate mining in China had already caused prices to fall—but after the committee meeting in May, Bitcoin’s price plunged until August 2021 to roughly $29,700 as miners hurried to relocate.
Bitcoin investment behaviour
Bitcoin demand increases as the supply get constrained as the most popular cryptocurrency. Wealthier investors maintain their Bitcoins long-term, limiting individuals with smaller assets from obtaining exposure.
According to data, the top 10,000 investors controlled one-third of all Bitcoins in 2020. Different brokers and other financial institutions continuously work feverishly to obtain clearance from their securities and exchange commission for bitcoin-backed securities. The number owned by institutions and major investors grows as more deposits emerge.
The investors, to some part, cause Bitcoin’s volatility. It is unknown how Bitcoin ‘whales’—investors with tens of millions or more in BTC holdings—would sell their big stakes into fiat money without impacting the market price of Bitcoin. If the ‘whales’ suddenly start selling their Bitcoin holdings, values collapse as other investors panic.
Most exchanges set daily restrictions on the amount that investors liquidate, usually in the $50,000 level. Therefore, investors possessing thousands of Bitcoin cannot liquidate their assets quickly enough to avoid massive losses.
If Bitcoin prices remain around $50,000, a more prominent investor could sell only one coin daily. Other investors would start selling, and prices would fall before anyone with more than $50,000 in coins could sell. The result brings massive and quick losses.
Bitcoin volatility also pegs on differing perceptions of its utility as a store of wealth and mechanism of value transfer. A store of value is a function of an asset permitting value retention in the future with some certainty. Many investors assume Bitcoin keeps growing and maintaining value, serving as an inflation hedge. In the alternative Bitcoin acts as a conventional store of value such as gold or other metals.
Bitcoin and media influence
News and media sources are businesses that require material for their readers and viewers. The media frequently publishes information and forecasts from “experts” not necessarily supported by anything other than views.
It is not uncommon to hear a Bitcoin investor predict that the crypto will soon be valued at hundreds of thousands of dollars. Others promote freshly created cryptocurrencies to steal Bitcoin’s market share.
However, the vast majority of this media attention and visibility works to impact the price of Bitcoin to benefit those with significant Bitcoin reserves. For example, when media sources announced Proshare’s debut of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price surged in the following weeks.
Investors leapt at the opportunity to obtain exposure to a cryptocurrency on an official exchange, resulting in a price increase to over $69,000. After the euphoria subsided and investors understood that the ETF was connected to Bitcoin via futures contracts sold on the commodities market, the price of Bitcoin sank to about $50,000.
While social media has a unique ability to captivate and thrill, its impact on the market provides cause for casual investors to be wary of Bitcoin’s volatility. The author of “Cryptocurrency Investing for Dummies,” Kiana Danial, advises against investing in cryptocurrencies based on social media trends.
Supply and demand effect on Bitcoin
Supply and demand have the most significant impact on the pricing of most commodities. Bitcoin’s market value depends on the number of coins in circulation and the willingness of buyers to pay. By design, the cryptocurrency is restricted to 21 million coins. The closer the circulation supply approaches this cap, the more the possibility of prices rising.
Upon hitting the limit, it is difficult to anticipate what will happen to the price; mining Bitcoin will no longer be profitable. Bitcoin’s price certainly varies in reaction to the activities of prominent financial actors as they vie for ownership in a market with limited supply.
With little historical background compared to more traditional investments, Bitcoin and other cryptocurrencies qualify as riskier assets due to their volatility. Crypto’s potential gain comes with a higher level of risk. Therefore, common sense indicates that any Bitcoin investment belongs inside the portfolio’s riskier, more extreme allocation.