Why Is Bitcoin Volatile?

Have you ever looked at the Bitcoin price chart, and felt your heart beat faster than usual? Well, you’re not alone. Bitcoin’s value fluctuations have earned it its popular reputation as a volatile asset. In layman's terms, the word ‘Volatile’ means liable to change rapidly and unpredictably, especially for the worse. But what exactly makes Bitcoin unpredictable?

Bitcoin, the world’s first decentralized digital currency, has over the last decade-plus, improved drastically. One Bitcoin has gone from being worth a few cents to reaching an all-time high of over $74,000. However, It has also experienced significant drops, sometimes losing over 80% of its value. This has left investors and analysts wondering why Bitcoin is so unstable and the factors that contribute to the price swings.

In this article, we’ll examine ‘Why is Bitcoin volatile’? We’ll explore various factors that contribute to its instability.

Why Is Bitcoin Volatile?

Price Discovery

New Ideas always need time to catch on, and that’s the case with Bitcoin. It’s a new kind of investment, and the market with its buyers and sellers is still figuring things out. It’s a bit like everyone’s still learning the ropes and sentiments about the currency are redefined regularly.

Bitcoin has only been around 15 years - a while longer than most crypto assets, so they are still in Price discovery. They're still figuring out their price and it means their prices can jump around a lot, as new people join in and try to agree on what these digital things are worth.

As lawmakers and financial institutions continue to address Bitcoin, their actions and statements can cause the supply and demand to have major fluctuations. The price reflects investor’s expectations for the future of Bitcoin, and this future is influenced by actions taken in the present.

Immature Markets

Another reason Bitcoin is Volatile is that the smaller market and recent creation of Bitcoin means that the markets and financial products that support Bitcoin need to be developed more. Compared to assets like stocks, Bitcoin is very difficult for investors to gain exposure to. Due to the smaller value of the market, the market depth is also lower for large markets. 

Buying and selling stocks mostly happens on a few big markets, like the New York Stock Exchange. But for Bitcoin, there are many different markets all over the place. This makes it tricky for big investors to jump in or out without messing with the price.

Limited Supply

This is another factor that contributes to the volatility of Bitcoin. The forces of supply and demand primarily shape the prices of most commodities like precious metals. Bitcoin’s market value is mainly influenced by the supply of coins in circulation and the willingness of individuals to invest. With a limit of 21 million coins that will ever exist and 19.5 million coins currently in circulation, the supply is being constricted each market cycle, also known as the halving which occurs every four years. 

A small number of people own a lot of bitcoin. If they decide to sell a bunch at once, it can cause a price drop. Bitcoin serves as a store of value, and in times of geopolitical uncertainty, when businesses or individuals seek to protect their assets, the demand for Bitcoin will continue to rise. This heightened demand, coupled with its limited supply, can lead to significant price volatility.

News Hype 

The Bitcoin Market is heavily influenced by investor sentiment and this can also be a major driver of price fluctuations. Like anything in the news, positive stories can drive the price up, while negative ones can send it down. Positive news or endorsements can lead to price rallies, while negative developments can trigger sharp declines, reflecting its sensitivity to external sentiment factors. 

The FOMO (Fear of Missing Out) factor is known with speculative assets as investors often hear stories of prices rising during a bull market and people taking profits, provoking them to enter the market and tell their friends and family to follow. This can be like a rumor that gets out of control. If a lot of people suddenly want to buy something, the price shoots up. But if the interest fades, the price can crash causing major price instability.  

Lack Of Regulation

Regulation is an important factor in market volatility. The Bitcoin market is not regulated by any government or big banks like traditional banks are. This can be either good or bad. Because there's no control, Bitcoin's price can jump way up fast (upside) but also plummet (bear downside) just as quickly. This is what makes it so volatile.

Getting Started With Bitnob

Indeed, Bitcoin is still figuring itself out and this can make its price jump around a lot, which is both a challenge and an opportunity. But as it gets more popular and established, like companies or gold, these big swings should become less frequent. 

However, volatility or not, every day is still a good day to buy Bitcoin and not when the price is high. 

On the Bitnob App, we’ve made buying Bitcoin super easy. With the Dollar Cost Averaging feature, you can be a proud owner of some bitcoins for as low as $1 and you can set a frequency for daily, weekly, or monthly savings plan to buy bitcoin. This is still the best way to invest in Bitcoin, even though fear of market volatility may creep in. Your daily $1 will go a long way. This can be demonstrated clearly by utilizing the Bitcoin DCA calculator. There’s no need to wait for the price to hit another all-time high when you can start now. 

Yet to give it a try? Download Bitnob to start your Bitcoin Journey.