Causes of Bitcoin Volatility

Why is Bitcoin so volatile?

Before we jump into discussing about its causes, let us look into the fundamental existence of Bitcoin.

 

• Bitcoin is constantly bought and sold by traders and cryptocurrency users.
• Bitcoin also has all the properties of money. Bitcoin is recognizable and accepted as a means of payment in some countries of the world. Top 5 countries are Estonia, USA, Sweden, South Korea & The Netherlands.
• Ultimately this cryptocurrency (or other altcoin) becomes an alternative investment asset class, for long term growth by some adventurous investors. More people, especially young people, are flocking to this space in numbers we have never seen before.

 

Here are just a few of the many factors behind Bitcoin’s volatility:

1. Hamper by bad news: Adverse event/s that scare people into selling, such as bankruptcy of Mt. Gox in early 2014; security fixes to vulnerabilities in their open source software through forking update; the high-profile use of Bitcoin in drug transactions via Silk Road that ended with the FBI shutdown of the marketplace in October 2013; China and South Korea have banned Initial Coin Offerings (ICOs), while Russian President Vladimir Putin has called for the sector’s regulation.

2. Bitcoin’s perceived value fluctuates: One reason why Bitcoin may fluctuate against fiat currencies is the perceived store of value versus the fiat currency. It is governed by a design decision by the developers of the core technology to limit its production to a fixed amount, 21 million BTC, a limited supply like Gold.  When fiat currencies show signs of strength or weakness, investors may allocate more or less of their assets into Bitcoin.

3. Sales of a large quantity of Bitcoins into the market will cause huge movement to its price. It resembles that of a small cap stock in a stock exchange. Due to its small float in circulation, a speculator could move the market quite easily with a “buy” or “sell” of a large order of Bitcoins.

4. Demand by people in some developing countries as a safer currency than its own country fiat. Situation, such as recent Venezuela‘s  high inflation and political & economical uncertainty, will encourage their citizens to procure cryptocurrency as security of value (same thinking as buying Gold)

5. As a debt instrument. The near frictionless transfer of Bitcoins across borders makes it a potentially highly attractive borrowing instrument for Argentineans, as the high inflation rate for peso denominated loans potentially justifies taking on some intermediate currency volatility risk in a Bitcoin denominated loan funded outside Argentina.

6. Tax treatment of Bitcoin also affects the volatility. Each time, a country announces any statement of its currency’s status will affect its price in the market.  The announcements by the IRS stating that the currency is actually an asset for tax purposes had moved the market somewhat, its volatility, is a case in point.  Each policy statement made by any country’s monetary authority will create mixed signals to the market for Bitcoin.

To read more: Why Is Bitcoin’s Value So Volatile? | Investopedia http://www.investopedia.com/articles/investing/052014/why-bitcoins-value-so-volatile.asp#ixzz4wa2YmfwI

 

The Bottom Line

Bitcoin presents a variety of opportunities that did not exist prior to its development.

For it to go into mainstream as a form of currency, it has to address investors’ concerns about its potential rate of adoption as an alternative currency.

Much of the volatility will be driven by “Fear and Greed” actions taken by Bitcoin market participants. Until more investors are confident of Bitcoin as a reliable store of value, the current yo-yo price fluctuations will persist in the foreseeable future, influenced mainly by marketplace sentiments.

 

Flash News (31-Oct-17):  CME Group Inc. is planning to have Bitcoin Future Contracts listed in its exchange before end of this year – The implication is volatility of  Bitcoin currency can be hedged! It addresses a major concern of Bitcoin’s usefulness as a stable stored currency.

CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American financial market company operating the world’s largest options and futures exchange.

 

If you would like to know whether you are ready for it,  please read my recent post on “5 Tips To Trade Bitcoin Or Volatile Cryptocurrency”

For cryptocurrency starter, you may like to consider opening an account with Coinbase, a secure online platform for buying, selling, transferring, and storing digital currency.

Note:- If  you buys or sells US$100 of digital currency or more through Coinbase using this link, you and your referral will both get US$10 worth of free bitcoin.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

 

You’re welcomed to comment on the above.

Thank you for dropping by.

Reuben Ong

 

[Author note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment in the worst case scenario.]