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Bitcoin experiences dramatic price swings. Find out how volatility affects Bitcoin’s usage.
Bitcoin’s rise to popularity started in 2010 when the price of one token climbed from tiny fractions of a dollar to about $0.09. Its price has swiftly increased by thousands of dollars since then, often rising and falling within a few hours or days. Its high volatility results from its rapid and hard-to-predict price swings.
Nevertheless, Bitcoin usage has significantly increased among mainstream institutions, merchants, and individuals worldwide. There are various reasons behind Bitcoin’s highly volatile prices. It’s crucial to understand those reasons and how they can help you determine volatility’s impacts on its usage.
Factors that Create Bitcoin Volatility and How They Impact its Usage
Like other assets, commodities, and products, Bitcoin’s price fluctuates according to supply and demand economics. However, other factors can also impact its prices upwards or downwards.
Supply and Demand
Supply and demand are the main determinants of an asset’s price. Bitcoin’s market value primarily depends on the number of coins in circulation, and the amounts of money people are willing to pay for it. Bitcoin’s supply limit is at 21 million tokens only, and the prices are likely to soar as we get closer to that limit.
It is not easy to predict what will happen when miners reach this limit, but mining Bitcoin will cease to generate any profit. Nevertheless, Bitcoin’s price will likely fluctuate as big financial players compete to own significant shares of its dwindling supply.
Investor Actions
Bitcoin is currently the most prominent crypto, and its diminishing supply is rapidly driving the market demand. That has prompted several long-term, wealthy investors to buy and hold Bitcoin, preventing smaller investors from gaining its exposure. The world’s top 10,000 investors held about a third of all Bitcoins as of 2020.
Many financial institutions and brokers, such as Yuan Pay Group are desperately pushing for regulatory approval to introduce Bitcoin-backed securities. That has also impacted a growing market demand for Bitcoin, pushing prices higher. Thus, large investors or whales also drive Bitcoin’s volatility.
Bitcoin prices will likely plummet if those investors suddenly start selling their Bitcoin holdings, as other investors would also panic. However, most crypto exchanges limit the amounts that their investors can liquidate in a single day to about $50,000 to prevent enormous losses.
Other experts also say that the varying belief about its utility as a store of value and a means of transfer could drive Bitcoin’s volatility. Several investors are confident that Bitcoin will retain its high value and growth as a haven asset to hedge against inflation. They describe it as digital gold.
Public Sentiments
News and media outlets are:
- The custodians of public sentiments.
- Presenting information and predictions from experts.
- Investors and other ordinary individuals.
While the contents are not always verified and backed by credible evidence, they significantly influence the markets. The attention and publicity mainly benefit those with large Bitcoin reserves.
For example, Bitcoin’s prices skyrocketed in late 2021 when media outlets revealed Proshare was introducing a Bitcoin Strategy ETF. Many investors rushed to gain exposure to Bitcoin, pushing its price to over $69,000. Later, the prices took a downturn to about $50,000 when investors realized the ETF link to Bitcoin via a futures contract traded on the stock market.
As some experts say, Bitcoin’s volatility can be a blessing or a curse. Negative volatility induced by significant declines in Bitcoin prices can make investors liquidate their assets, rapidly discouraging its adoption and usage. On the other hand, positive volatility indicates price growth, a higher value proposition, and increasing investor confidence in Bitcoin. That would undoubtedly impact its increased usage as payment and a store of value.
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Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
Cryptocurrency trading involves high risk, and is not suitable for all investors. Before deciding to trade cryptocurrencies, tokens or any other digital asset you should carefully consider your investment objectives, level of experience, and risk appetite. TaxGuru does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions. By the use of the above information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.
