Newness is the primary reason for crypto volatility. Bitcoins are no exception to the rule: new concepts take time to settle and become commonplace. Cryptocurrency volatility is primarily caused by its newness. The same is true for cryptocurrencies, which take time to agree to and accept. If you are interested in Bitcoin trading, check News Spy platform.
Newness is the primary cause of crypto volatility. For cryptocurrencies, the same holds for all new concepts that take time to acknowledge and resolve. There have been instances in the past when the prices of other cryptocurrencies were highly volatile. The volatility of cryptocurrencies can be attributed to several factors.
Definition of “Volatility” In Bitcoin Investment
So, what is “Volatility” and what do you mean by that? In simple terms, the price variation over time concerning an asset’s average price is a measure of volatility. Volatile investments have significant fluctuations in price.
Most other assets, including debt and equity, have increased by five times over the past five years. In addition to indicating the potential for above-average returns, volatility also shows risk. The short-term investment potential of Bitcoin is less predictable than that of other investments.
Why Bitcoin Is So Volatile: Key Points To Note
Several factors have caused Bitcoin’s volatility. Bitcoin’s nascency and market dynamics are primarily responsible for these factors. The Bitcoin markets cannot absorb the supply and demand shocks caused by world events without significant impacts on the market. The Bitcoin markets cannot absorb the drastic changes in investor expectations based on world developments. As a result, Bitcoin’s spot price can undergo drastic changes.
1) Cash flow-free speculation
Because of the asset’s nature, Bitcoin is prone to speculation. You can only make investments in Bitcoin based on its current value. Cash flow value is typically used to value most assets. Investing in stocks can result in dividends, or bonds may yield coupons. While these cash flows will always involve some uncertainty, they provide a relatively straightforward method for calculating the asset’s price, creating a perception of lower risk.
Cash flows, however, do not determine Bitcoin’s value. Somewhat, the price and demand of Bitcoin are closely tied to its use within the global economy. Every assumption drastically impacts price expectations, resulting in a broader range of price predictions.
2) Capitalization of a small company
Bitcoin’s distribution also influences rapid price movements. An asset’s supply and demand determine the mechanics of trading. The market price of Bitcoin is $ 1 trillion, which is only a fraction of gold. An individual or entity that buys or sells bitcoins can significantly impact the price by themselves.
Individuals and groups in large amounts also own Bitcoin. Bitcoin’s supply increases dramatically in a short period if a large buyer decides to sell. For assets with lower market depth, less capital is required to have a significant impact.
3) An emerging market
Since Bitcoin has a smaller market and was created recently, the needs and financial products supporting Bitcoin are underdeveloped. Investors have a hard time getting exposure to Bitcoin compared to assets like stocks. As a result of the smaller market value, large traders can also not access the full market depth. Furthermore, whereas a few major stock exchanges dominate the market, Bitcoin liquidity is distributed among many platforms.
A position can usually be hedged or leveraged with various derivatives and other methods available with most assets. Bitcoin options and derivative instruments are still in the early stages, so investors do not have access to them. The development and maturation of these derivative products will help smooth the volatility of Bitcoin.
The Future of Bitcoin: Volatility or Stability?
Bitcoin’s volatility will be driven less by several factors over time. The currency is progressively regulated in countries around the world. Bitcoin’s price volatility should decline as long-term regulations become clear.
With the asset growth every single day, individual holders’ market-moving potential will decline. Putting upward pressure on the Bitcoin market price will require a more significant amount of fiat currency. It is still possible for large individual holders to put downward pressure on prices. Large holders, however, can’t do this forever.
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.