Bitcoin is the first cryptocurrency and was designed to function as a medium of exchange and a store of value. These functions are affected by its price volatility, which is much higher than those of traditional currencies. In this article, we will try to explain what is Bitcoin volatility and what causes it.
What Is Bitcoin Volatility
The general definition of volatility is the standard deviation of logarithmic returns on an investment, meaning the price fluctuation of Bitcoin over a certain period of time. A more volatile asset has larger price movements and this can be seen on the price chart as, after buying or selling some Bitcoins, the price would change by no small amount in just a few minutes. As a result, the higher volatility of Bitcoin can contribute to greater profits or losses. This makes Bitcoin a great asset to trade has it can provide higher potential returns than an asset with little volatility.
Volatility is not essentially a good or bad thing for investors, you just have to understand where it comes from and factor it into your strategies. The factors that cause volatility are all dependent on three fundamental factors: supply, demand, and uncertainty.
Bitcoin Market Size
Last year, the total market cap of Bitcoin in Q4 was around USD 66.18 billion. Comparatively major stock and forex exchanges can have over USD 1 trillion of market cap. While still growing, cryptocurrency markets are undoubtedly still far from reaching the heights of stock and forex markets.
Small markets are easier to manipulate than bigger ones. As Bitcoin’s market cap of USD 66.18 billion is aggregated from several exchanges and is by far the biggest market cap of cryptocurrencies, each exchange would have a much smaller market cap than that. Each exchange would; thus, be vulnerable to high fluctuations as major investors and groups of investors enter or exit the markets.
Low Bitcoin Liquidity
Assets like Bitcoin are still quite illiquid: they are difficult to convert back into cash. The reason behind it is that few parties are willing to take a stake in Bitcoin and there are large orders are far and large. The price imbalances are also slow to correct.
In recent years, the public awareness of what is Bitcoin and where its value lies has grown, attracting more enthusiasts to invest in Bitcoin. Some organizations are working to create more Bitcoin ATMs and make it easier for the public to use Bitcoin. All of these helps enhance Bitcoin liquidity, however, this is far from enough. This issue will need to be addressed or greatly improved for the market to really reach maturity.
Another factor that leads to Bitcoin’s volatility is the lack of regulations. Although there aren’t many clear governmental regulations on Bitcoin, a regulatory announcement on Bitcoin can have a significant impact on its volatility.
Since its invention in 2009, several governments have tried to make regulations about Bitcoin and other cryptocurrencies. For example, in September 2017, when words that China was shutting down Bitcoin exchanges spread, Bitcoin’s volatility climbed from 64% to 88% in 6 days.
In January 2018, the South Korean government officials also cracked down on cryptocurrency trading, trying to interfere with the anonymity of transactions. This move was made a huge blow in the crypto world and greatly affected the volatility of all coins including Bitcoin.
In a word, Bitcoin regulations are a crucial part of what affects Bitcoin’s volatility.
Bitcoin News Influence on Public
Major news events is a crucial factor that affects Bitcoin’s volatility as it not only affects Bitcoins traders but also shape’s the general public’s attitude regarding whether or not investing in Bitcoin is a good idea, as many have little to no knowledge about cryptocurrency trading. An optimistic tone in the news can result in a positive attitude of the general public towards the Bitcoin market and thus increases its demand and may bring up the price. What’s more, if media exposure of Bitcoin grows, more people will be brought into the market and the volatility will certainly be influenced. Therefore, the Bitcoin news influence on the public is another crucial fact.
This concludes today’s article on Bitcoin volatility and the factors that cause it. In short, because of its high volatility Bitcoin can be classified as a speculative investment rather than a traditional currency. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.