The Volatility of Bitcoin: Understanding Bitcoin's Price Volatility
One thing that has gone hand in hand with the advent of Bitcoin has been the means to make the greatest bets on its wild price swings.
Fluctuations in the price of Bitcoin are quite famous for being highly frequent. It may be one of the reasons that the fluctuations in the price of Bitcoin is one of the large profits yet risky ways to prove to occupy a trader’s attention. In the broad spectrum of the cryptocurrency market, Bitcoin’s fluctuation is something that every market participant has to be informed about.
Its volatile swings can change or spoil investment decisions right across the economy, as well as the wider financial stability.
Background of Bitcoin: A New Era of Digital Currency
The first P2P (peer-to-peer) financial product to hit the market — in 2009, no less — copatterned with its own abstracted and obsolete pneumonic device: Bitcoin. It self-clears (and all transactions on it likewise) against a — a database kept simultaneously on a distributed network of interconnected computers.
This was the technology that drove Bitcoin: not merely different, but something that hadn’t yet occurred to anyone. The blockchain was money you couldn’t lose. It was money you couldn’t print. It was money that couldn’t be seen, except by you, if you chose to tell them it existed. It was money you could spend without asking the banks.
Why Is Bitcoin’s Price So Volatile?
Any attempt to parse out what’s going on with the price of Bitcoin needs to account for all of the things that can affect it. Following is a list of several dynamics that contribute to the volatile price of Bitcoin.
Supply and Demand Dynamics
Bitcoin’s supply is fixed — in fact it tops out at a maximum of 21 million coins: bitcoin is a deflationary asset. In other words, it becomes hugely price-sensitive on any change of demand. This is the fourth and final pillar of bitcoin. It’s how it will reach its 21 million bitcoin cap.
It is called halving — and it usually happens every four years, when the reward a miner receives for mining a block of Bitcoin transactions is halved. At the very beginning, a miner received 50 bitcoins per block. Now it is 12.5 bitcoins. That halving will recur three times before the bounty is whittled down to a far smaller fraction of a bitcoin. Today, there are around 19.6 million bitcoins in circulation, and 21 million will not be hit before 2140.
Surges in demand from investors can cause prices to rise, or plummet with reduced demand.
Market Sentiment
Nothing this side of the Wailing Wall exerts as much influence over investor sentiment as breaking news and market bubbles. Good news creates Tulip-mania, leading to trading at irrationally high prices — and the inevitable crash. Bad news leads to panic selling. So just how much does this bias by news contribute to Bitcoin’s volatility?
Regulatory Impact
Notoriously, regulatory announcements from far-flung countries could set off disruptive, and usually unpredictable, value cascades throughout bitcoin markets. Although regulatory news can produce short-term jitteriness, it’s worth remembering that these developments are part of a larger, more constructive trend as well: far-flung and diverse people, reacting to a new form of innovation that variously unsettles, interests, and enthralls, are working to fashion regulatory frameworks that can accommodate and govern promising new technology.
Take the Fifth Anti-Money Laundering Directive (or 5AMLD) that came into effect in the European Union in early 2020, extending the obligations of moneyness to cryptocurrency exchanges and custodian wallets. But legitimizing financial inclusion has had a snowball effect on the ecosystem, drawing mainstream financial institutions into cryptocurrency markets and products.
Likewise, we’ve observed that (i) in Canada, the Startup Exemption (which permits early-stage, unregistered startups to issue securities to a capped number of investors without going through onerous registration and disclosure processes) and (ii) the Crypto Asset Working Group (a working group comprised of OSC staff and industry members that conducts formal regulatory consultation with respect to the crypto ecosystem) make the regulatory playing field more conducive to innovators and investors who want to get involved with digital assets.
Canadians can now invest in Bitcoin in a safe and convenient way as a result of the OSC greenlighting several Bitcoin ETFs.
They establish a legal framework to regulate relations between consumers and those engaged in legal and illegal activity, as well as establishing cryptocurrency as a legitimate reserve of value in the eyes of the law. When regulators do their job well, more people — from retail to institutional — will be willing to buy and hold, producing a calmer market with less froth.
Bitcoin Volatility Index: Gauging Market Movements
How do we measure that? Enter the Bitcoin Volatility Index (BVIX). Every day, an indicator from Bloomberg called the BVIX promulgates Bitcoin’s expected volatility, based on data supplied through the options market. For any trader considering an investment in Bitcoin, this tool provides a relevant look at market sentiment and risk conditions, and thereby allows one to make more informed decisions.
Investor Behavior and Market Dynamics
Bitcoins are being traded by a mix of retail, or private, investors and institutions (called hedge funds); each brings its own behavioral imperatives to each trade, and a whole host of trading platforms (bitcoin exchanges) simply ease access to the marketplace and provide more volume (liquidity) — and, conversely, increase volatility.
Tim Draper’s $250K Bitcoin Prediction
The venture capitalist Tim Draper gave his price prediction for 2024 in a recent interview with Coin Bureau. Also last week, London’s crypto community paid tribute to crypto entrepreneur Henrik Hjelte, despite opposing his preferred technology, ethereum classic. This highlights the adaptive nature of crypto-libertarians, as it folds into its core narrative.
He said that when BTC cost around $4,000, he had said it would reach $250,000 four years from then: ‘The thing that shocks me today was that Bitcoin couldn’t go past $4,000 four years ago. And what I didn’t think at the time was, how scared and how stale brain the U.S. was going to be. And I think if the US had been open to this, we would actually be having an interaction with people the way I am having it with the people of El Salvador, because El Salvador was the first country to make Bitcoin legal tender, along with the US dollar.’
Challenges in Predicting Bitcoin’s Volatility
Its particular type of market is opaque and prone to sudden and random shifts that seem divorced from the traditional market signals that inform other asset classes.
Pundits and investors alike try to predict its next move with elaborate models and analysis tools, but predictions are rarely effective.
The first problem is that the market for cryptocurrencies is relatively immature. It is extremely difficult to apply long-term, data-proven models to a commodity (such as BTC) that has existed for barely more than a decade. For assets such as stocks and commodities, centuries of history can be drawn upon — something that doesn’t exist for BTC.
Furthermore, Bitcoin’s market is a sentiment-driven one. The sentiment is affected by a highly diverse set of factors, such as geopolitical events, implementing regulations, advances in blockchain technology, etc. Each factor can potentially induce a nonlinear change of price.
On top of this, Bitcoin has a highly decentralized structure, with no central authority or regulating body, meaning that movements in the market reflect the cumulative decentralized actions of thousands of people all over the world. It’s hard to read the collective mood and behavior.
Algorithmic trading (which models anticipated future price movements based on previous data, and then trades on those speculations at extremely high speeds), and bots working on unapparent triggers, or on predicted pre-emptive strategies that anticipate market movements (which then become self-fulfilling prophecies), are simply increasing the chaos.
And ultimately, the arrival of institutional investors, each with its own strategies and thresholds for buying and selling, is also a game-changer for prediction. These organizations can shift the market in a big way and their actions are often prompted by a mix of proprietary signals and macroeconomic measures whose movements aren’t always adequately understood or predicted.
Best Place to Purchase Bitcoin?
Blockforia.com is by far the place that offers one of the best Bitcoin exchange services. You have the option to buy Bitcoin with credit and debit cards, making it a really simple process from start to finish.
Blockforia.com is run by Blockforia EOOD. Blockforia EOOD is a registered EU-based cryptocurrency exchange regulated by The National Revenue Agency in Bulgaria.
Summary
With so many variables at play, even the best predictive analytics can’t provide much breathing space when confronted with a market where human and inhuman behaviors, new technologies, and world events conspire to always unsettle the field of play. Nothing is certain, and one of the most valuable skills just might be the ability to roll with the rapid punches.