Considering the latest happenings in the crypto world, you may be wondering why is Bitcoin’s price so volatile? How can a cryptocurrency’s price soar from $1,000 to just under $20,000 in a bit more than a year?
Clearly, there are no simple answers for these questions and, even though anyone with an economics degree could very well say “it’s all about the supply and demand,” there’s something more to the story of why Bitcoin’s price fluctuates so much.
It’s still something new
For starters, it’s important to understand that Bitcoin is still a very new cryptocurrency, with a new concept behind it. Even though Bitcoin was first released in 2009, it hasn’t gained much popularity before 2017. This also means that Bitcoin is still owned by a tiny amount of people. According to this report, 4% of the people who own Bitcoin, own about 95% of the cryptocurrency.
Buying and selling Bitcoin
In theory, each transaction that involves the purchasing of Bitcoin, whether we are talking about fiat or another cryptocurrency tends to push the Bitcoin prices up. Similarly, every transaction that involves the selling of Bitcoin, no matter its size, could very well cause a slight downward trend.
The platform’s limitations
Those who are familiar with the problems of the crypto world will know this, but Bitcoin has a characteristic inability to provide its users with cheap transactions because of its limited block size. This limitation can be a very important reason why Bitcoin’s price shifts so much.
News and media
Right off the bat, we will say that it’s impossible to accurately predict what effects news announcements have on the price of Bitcoin. However, some patterns have been observed, one of which is the fact that big news announcements usually coincide with some price movements in the Bitcoin market. News can increase as well as decrease the demand flow from people either entering or leaving the ecosystem.
The most interesting aspect of how the media affects the price of Bitcoin is the fact that negative news also seems to have a noticeable effect causing the price to drop. There have also been a couple of cases when the negative publicity has helped popularize the cryptocurrency even more.
Technological changes
Since Bitcoin is such a volatile currency, it’s no surprise that even the smallest internal changes can affect its price. Just imagine how many aspects can change once Bitcoin ads a new technology to its platform. One relevant example is when Bitcoin integration has been added to the PayPal system, sparking or renewing the interest for the currency.
Regulations, governments decisions, and political risks
You may hear that some governments are adamant on banning Bitcoin. The reasons behind this move are numerous. Since Bitcoin is not a fiat currency, it’s not bound to any government regulations. Drastic changes in the price or Bitcoin have been observed whenever a government imposes a restriction or a ban on the use of Bitcoin.
Some countries (with Japan being the most relevant example) have accepted Bitcoins as a legal currency. This type of legitimization has led to a clear increase in the price of Bitcoin.
Another noteworthy aspect is the political risk usually associated with national currencies. In short, anything from an economic crisis to an uneasiness about a national event can have very big effects on a currency’s price, Bitcoin included.
Interest from institutional investors
Another important fact that determines the price of Bitcoin is the interest from institutional investors. As more and more institutions will accept cryptocurrencies and will design new successful products based on them, we are bound to see an increase in Bitcoin’s price.
Interest from Asia
Asia is definitely a very important investment area for all cryptocurrencies, not just Bitcoin. According to a report, even though some Asian countries have imposed strict regulations and bans on cryptocurrency, this hasn’t stopped various investors to continue investing in Bitcoin.
Final thoughts
As expected, there’s a wide array of factors that can potentially impact the value of Bitcoins, and this is by no means a complete list. We hope this list will help you get a better understanding of the fragility of Bitcoin’s price and, ultimately, make better and more informed decisions when it comes to investing in Bitcoin.
