Price Overreactions and Bitcoin Fluctuations

Price Overreactions and Bitcoin Fluctuations

It’s been 13 years since bitcoin was first introduced, and in this short time, it has become one of the most traded assets throughout the world. Its popularity is growing daily, and vast amounts of money are transacted daily. Although it is in more demand daily, it’s worth does not simply increase. Their value keeps fluctuating; unlike other assets, these fluctuations are pretty high and more regular. Like in 2017 when it rose to 20% and a few months later also fell by 70%. This type of market behavior has been seen many times, not to mention the current market drop after a considerable rise in 2021. It has been researched that Bitcoins provide the highest returns vis with a vis other asset but are also exposed to more threats than any other. One of the finest choices for market investors is the bitcoin trader user-friendly software that can perform trading activities very quickly. However, there is always a question for Bitcoin about such market volatility. Some reasons have been listed below:

Reasons for Price Fluctuations

Supply and Demand: The fluctuations in the prices of many commodities generally result from their supply and demand pattern. The price will rise in proportion to the level of demand. This simple economics is also applicable to Bitcoins. Bitcoins demand in the recent years has been rising hugely, which booms up the price. Moreover, there are supposed to be only 21 million bitcoins worldwide. Therefore, it has regulated the overall supply of this currency, whereas the people who want to invest in it are much higher. As a result, it also contributed to the high value of bitcoins.

Regulation Factor: As only 21 million bitcoins will exist in the market, it becomes complicated for the investors to predict what will happen to the value of this currency after they all are mined. It is believed to have lost its importance, making investors speculate in this market for short periods. Many parties hold many Bitcoins, and any change in their actions affects this market drastically.

No institutional backup: Though not having an institutional backup has played some positive role for this currency in its way. It also is a significant factor that affects the stability of bitcoins. For instance, fiat currencies are backed by government institutions, and their value is very stable because of government interference. But bitcoins depend purely on a demand-supply basis and have no stable value.

Government Approach: For any commodity, government plays a huge role in its development. Bitcoins, too, are highly impacted by the government’s behavior. Different countries have different approaches to this currency. Some developing countries see this as a revolution and an opportunity to grasp the global market, whereas some developed countries still question its existence. The government addresses issues in this market, like environmental and illegal uses. Bitcoins are mined using high-tech computers, which requires a lot of electricity and results in carbon emissions. In addition, the anonymity of this currency allows illegal buyers to buy local products like drugs. These are some reasons for the mixed approach this currency is facing. El Salvador made it a legal tender which is a huge positive for this currency, whereas China banned its mining due to environmental issues. As long as these mixed approaches exist, there will always be instability in this market.

Infancy phase: The gold and the fiat currencies governments used have been in the market for a long time. Its usage demand and supply are somewhat predictable, keeping its value stable. Bitcoin, on the other hand, is a relatively new currency. Its applications are continuously being researched and explored. So, its prices will keep changing until prices stabilize, if possible.


Experts can say that the prices of Bitcoin will continue fluctuating shortly. It can yield more significant returns, but crypto can crash its value to zero anytime. It is because this market is subjected to human behavior. Bitcoins only hold some value till their users think it has some value. Despite all this, people’s interest in this currency is increasing, and it can be a substitute for traditional currencies someday. But again, it becomes vital for the investors to spend on limits until some more positives are developed.

Disclaimer: The presented material by no means represents any financial advice or promotion. Be sure to do your own research and acknowledge the possible risks before using the service of any cryptocurrency platform.

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