Why is the Bitcoin exchange rate so volatile

The Bitcoin course has been reminiscent of a roller coaster in recent years. In 2013, Bitcoin was still at USD 100 and then slowly rose to USD 200 in 2015. In 2017, it soared to almost USD 20,000. This was followed by a crash to below USD 4,000 towards the end of 2018. In this article, we want to get to the bottom of these price fluctuations

What is Bitcoin Volatility?

The fluctuations in a price are also called volatility.
Bitcoin's price can fluctuate a lot, so the cryptocurrency is very volatile. Bitcoin contrasts with so-called stablecoins, i.e. cryptocurrencies that are tied to a currency. These include Tether (USDT) and USD Coin (USDC). These coins are particularly not very volatile and
change their course only slightly.

The volatility is measured using a volatility index. Bitcoin's volatility is currently around 5%. That's quite a lot when you compare it to gold (1.2%) and fiat currencies (between 0.5% and 1%).

But volatility in itself is not a bad thing. Above all, volatility is a sign of risk. This has an attractive effect on some investors, and a deterrent on others.

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Why is Bitcoin so volatile?

1. Market capitalization

First of all, it should be noted that Bitcoin is only one small asset among many "giants". At its peak to date, Bitcoin had a market cap of $ 320 billion while the total market cap of the crypto market was $ 850 billion. For comparison, Apple had a market capitalization of $ 1 trillion (1,000 billion) at its wedding and the gold market has an estimated capitalization of $ 7 trillion (7,000 billion). Compared to other assets, Bitcoin is still relatively small. For this reason, it is easier to influence as an asset, which contributes to the price fluctuations.

2. Bitcoin whales

In the crypto sector, “whales” are those investors who buy large amounts of a cryptocurrency, e.g. B. Bitcoin. When these "whales" move their cryptocurrencies or sell or buy them on a large scale, this creates "waves" in the price.

3. Liquidity

Liquidity shows how quickly an asset can be exchanged or traded. For a high level of liquidity, there must be a large number of buyers and sellers willing to trade. For example, if someone sells a large amount of Bitcoin and there aren't enough buyers at the desired price, the price will go down. This also contributes to the fluctuations in the price of Bitcoin.

4. News

Bitcoin is still a relatively new asset class and very different from anything that has come before. News and rumors can therefore have a major impact on the price. Traders always try to foresee the effects (for example) a hack on a crypto exchange or rumors of a Bitcoin ban in a certain country.

5. "Forks"

At its core, Bitcoin is simply software that people all over the world use and develop voluntarily. A “fork” occurs when there are irreconcilable differences between the developers and the users. As a result, there are two incompatible versions of the software that exist at the same time. Forks create uncertainty about the future of a cryptocurrency. That in turn creates price fluctuations as the traders try to predict the future
pretend to make the right trades.

The most famous fork of Bitcoin so far was the one that led to the creation of Bitcoin Cash (BCH). Bitcoin Cash wanted to return Bitcoin to its originally planned function as a payment system.

6. Speculation

The inventor of Bitcoin, operating under the pseudonym “Satoshi Nakamoto”, originally conceived the cryptocurrency as an electronic peer-to-peer payment system. Today, however, many see Bitcoin as "modern gold", i.e. a store of value. The harshest critics say that Bitcoin does not have to be worth anything because it is not backed by anything. The Bitcoin proponents, on the other hand, emphasize decentralization and the limited amount. They therefore believe that it is potentially worth more than other assets. Since Bitcoin was once worthless and some will see it at a rate of 1 million USD (per coin) in the future, the door and gate are of course open to speculation. These speculations, in turn, cause the course to fluctuate.

The future

Bitcoin will continue to fluctuate in price. However, with the increase in market capitalization and the addition of further institutional investors, the fluctuations are likely to decrease.
Increasing regulation should also help. In any case, Bitcoin is an interesting piece of the future and ideal to round off your own portfolio in a contemporary and possibly very lucrative way.

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Last update January 16, 2010

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