What Makes Bitcoin So Volatile?
Traders are always concerned about ‘Bitcoin”s volatility. It is important to know what makes the value of this particular digital currency highly unstable. Just like many other things, the value of ‘Bitcoin’ also depends upon the rules of demand and supply. If the demand for ‘Bitcoin’ increases, then the price will also increase. On the contrary side, the decrease in demand for the ‘Bitcoin’ will lead to decreased demand. In simple words, we can say that the price is determined by what amount the trading market is agreed to pay. If a large number of people wish to purchase ‘Bitcoin’s, then the price will rise. If more folks want to sell ‘Bitcoin’s, then the price will come down.
It is worth knowing that the value of ‘Bitcoin’ can be volatile if compared to more established commodities and currencies. This fact can be credited to its comparatively small market size, which means that a lesser amount of money can shift the price of ‘Bitcoin’ more prominently. This inconsistency will reduce naturally over the passage of time as the currency develops and the market size grows.
After being teased in late 2016, ‘Bitcoin’ touched a new record high level in the first week of the current year. There could be several factors causing the ‘Bitcoin’ to be volatile. Some of these are discussed here.
The Bad Press Factor
‘Bitcoin’ users are mostly scared by different news events including the statements by government officials and geopolitical events that ‘Bitcoin’ can be possibly regulated. It means the rate of ‘Bitcoin’ adoption is troubled by negative or bad press reports. Different bad news stories created fear in investors and prohibited them from investing in this digital currency. An example of bad headline news is the eminent utilization of ‘Bitcoin’ in processing drug transactions through Silk Road which came to an end with the FBI stoppage of the market in October 2013. This sort of stories produced panic among people and caused the ‘Bitcoin’ value to decrease greatly. On the other side, veterans in the trading industry saw such negative incidents as an evidence that the ‘Bitcoin’ industry is maturing. So the ‘Bitcoin’ started to gain its increased value soon after the effect of bad press vanished.
Fluctuations of the Perceived Value
Another great reason for ‘Bitcoin’ value to become volatile is the fluctuation of the ‘Bitcoin”s perceived value. You may know that this digital currency has properties akin to gold. This is ruled by a design decision by the makers of the core technology to restrict its production to a static amount, 21 million BTC. Due to this factor, investors may allocate less or more assets in into ‘Bitcoin’.
News about Security Breaches
Various news agencies and digital media play an important role in building a negative or positive public concept. If you see something being advertised Advantageously, you are likely to go for that without paying much attention to negative sides. There has been news about ‘Bitcoin’ security breaches and it really made the investors think twice before investing their hard earned money in ‘Bitcoin’ trading. They become too susceptible about choosing any specific ‘Bitcoin’ investment platform. ‘Bitcoin’ may become volatile when ‘Bitcoin’ community uncovers security susceptibilities in an effort to create a great open source response in form of security fixes. Such security concerns give birth to several open-source software such as Linux. Therefore, it is advisable that ‘Bitcoin’ developers should expose security vulnerabilities to the general public in order to make strong solutions.
The latest ‘OpenSSL’ weaknesses attacked by ‘Heartbleed’ bug and reported by Neel Mehta (a member of Google’s security team) on April 1, 2014, appear to had some descending effect on the value of ‘Bitcoin’. According to some reports, the ‘Bitcoin’ value decreased up to 10% in the ensuing month as compared to the U.S. Dollar.
Small option value for holders of large ‘Bitcoin’ Proportions
The volatility of ‘Bitcoin’ also depends upon ‘Bitcoin’ holders having large proportions of this digital currency. It is not clear for ‘Bitcoin’ investors (with current holdings over $10M) that how they would settle a position that expands into a fiat position without moving the market severely. So ‘Bitcoin’ has not touched the bulk market adoption rates that would be important to give option value to large ‘Bitcoin’ holders.
Effects of Mt Gox
The recent high-profile damages at ‘Mt Gox’ are another great reason for the ‘Bitcoin’ volatility. All these losses and the resultant news about heavy losses had a dual effect on instability. You may not know that this reduced the general float of ‘Bitcoin’ by almost 5%. This also created a potential lift on the residual ‘Bitcoin’ value due to the reason of increased scarcity. Nevertheless, superseding this lift was the negative outcome of the news series that followed. Particularly, many other ‘Bitcoin’ gateways saw the large failure at Mt Gox as an optimistic thing for the long-term prospects of the ‘Bitcoin’.