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Bitcoin – the world’s largest digital currency by market capitalisation, has led to some incredible returns for certain investors. We have all heard tales of ‘Bitcoin Millionaires’- people who got rich by investing in the cryptocurrency and holding it long enough to gain a considerable profit.
However, many people attribute this to Bitcoin’s highly volatile nature since the digital currency experiences significant price fluctuations.
Price fluctuations in the Bitcoin spot rate are determined by many factors. Volatility is usually measured by the Volatility Index, also known as the CBOE Volatility Index (VIX). The Bitcoin Volatility Index has also recently become available to track the volatility of Bitcoin over different periods of time.
Bitcoin’s value has been historically quite volatile, but why?
Here are a few of the several factors behind Bitcoin’s volatility:
Small Market Size
Just like other digital currencies, Bitcoin’s market is relatively small when compared to markets for traditional assets such as stocks, bonds and fiat currencies. The total market capitalisation (market cap) of Bitcoin pales in comparison to the scope of these traditional asset markets.
Why does this matter? Large markets are more resistant to manipulation than small markets. Bitcoin’s market value is aggregated from several exchanges. In other words, the total figure represents several different markets.
While the changes in supply and demand could be due to shifting market sentiment or investors reacting to some news, they could also be caused by efforts to manipulate the market. All it takes is one major investor or a group of smaller investors working together to create a sharp gain or loss in the value of a particular digital currency.
News
News is a major factor that contributes to the volatility in Bitcoin prices. When news is positive, it can drive investor interest and cause market participants to buy Bitcoin, pushing its price higher.
Media outlets have also published plenty of negative news surrounding Bitcoin which leads to sharp and sudden price drops.
Regulation
The first Bitcoins came into existence in 2009. Since the inception of Bitcoin, multiple governments around the world have made efforts to regulate Bitcoin and other digital currencies. This is another area potentially contributing to Bitcoin’s intense volatility.
While various governments have initiated efforts to develop regulations for Bitcoin and other digital currencies, lawmakers and regulators have not yet worked together to create regulation that spans many nations.
Inequality of Wealth
Data from BitinfoCharts shows that in 2017, the top 10 largest Bitcoin wallets held roughly 10% of the currency.
If a person collects a sizable amount of Bitcoin, he or she can trigger substantial price fluctuations by selling a fraction of his or her Bitcoin holdings.
Sentiment
If the sentiment surrounding Bitcoin becomes more positive, this can contribute to sharp increases in demand and upswings in price. Furthermore, price gains and optimism can combine to create media hype cycles that take place when climbing values cause greater media coverage. This triggers additional purchases and price appreciation.
Changes in sentiment can have the exact opposite effect on price. If investors start fleeing an asset like Bitcoin, the plunging prices can prompt widespread media coverage, causing even more people to either sell or simply avoid purchasing it.
Speculation
Several observers of the market have noted that speculation plays a key role in Bitcoin’s price fluctuations.
Bitcoin is a speculator’s dream, the only thing that will impact its price is how other investors believe the price is going to change. This is why selling futures contracts and other derivatives in Bitcoin can be both fruitful and frustrating depending on speculation and the eventual outcome of it.
Cryptocurrencies like Bitcoin are volatile because at the end of the day they’re all about speculation.
Conclusion
The market won’t stay so volatile forever as technological improvements should make transactions easier and more secure, increasing the popularity and stability of the cryptocurrency.
However, that being said, the Bitcoin market will seemingly stay volatile for the foreseeable future. Is this a problem for new investors who are unfamiliar with cryptocurrencies?
The answer to this question is subjective and largely depends on your perspective.
Bitcoin’s volatility should not prove to be a massive problem if you take it into account when creating an investment strategy. It opens up new opportunities for both experienced and inexperienced investors.
It’s safe to say that investors who are interested in investing in Bitcoin may benefit significantly from conducting research and examination before getting involved. So, educate yourself sufficiently before diving into the world of Bitcoin.
Also you can download the app and Start Trading Now!
Android App – Bitcoin Exchange
iOS App – WazirX
Frequently Asked Questions
How Bitcoin Works?
Bitcoin is based on the blockchain, a distributed digital ledger. As the name implies, blockchain is a connected database made up of blocks that hold information about each transaction, such as the date and time, total value, buyer and seller, and a unique identifier for each exchange. Entries are linked in chronological sequence, forming a digital chain of blocks. Blockchain is decentralized, meaning a centralized institution does not own it
What Type Of Currency Is Bitcoin?
Bitcoin is a type of digital currency or cryptocurrency. In January 2009, Bitcoin was established. It's based on Satoshi Nakamoto's ideas, which he laid out in a whitepaper. The name of the individual or people who invented the technology remains unknown.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
What Is Bitcoin Used For?
Bitcoin was created as a means of sending money over the internet. The digital currency was designed to be a non-centralized alternative payment system that could be used in the same way as traditional currencies. Bitcoin is being used by an increasing number of businesses and individuals. This includes establishments such as restaurants, apartments, and law firms.
How To Invest In Bitcoin?
Bitcoin may be invested in two ways: through mining or exchanges. Bitcoin mining is carried out by high-powered computers that solve challenging computational arithmetic problems that are too difficult to complete by hand and complex enough to tax even the most powerful computers. WazirX, a Bitcoin exchange, is another alternative.
Is Bitcoin Safe And Legal In India?
In 2020, the Supreme Court of India lifted the RBI’s restrictions on cryptocurrencies. According to the Supreme Court, the existence of Bitcoin or another cryptocurrency is unregulated but not unlawful. The verdict has greatly aided the world of digital money in the country. To put it another way, investing in Bitcoin is perfectly legal, and you may do so through various apps and traders.
Is Bitcoin Mining Free?
Bitcoin mining isn't free, but it can be tried on a budget. Bitcoin mining is an essential part of the blockchain ledger's upkeep and development and the act of issuing new Bitcoins. It is accomplished by the use of cutting-edge computers that tackle complicated computational arithmetic problems. The effort of auditor miners is rewarded. They're in charge of ensuring that Bitcoin transactions go off without a fuss and that they're legal.
How Much Is 1 Bitcoin Worth Today?
Check out the current price of Bitcoin on the WazirX exchange. Bitcoin's value is primarily determined by its supply and demand in the market. Other elements have an impact on its worth. Its intrinsic value can also be calculated by calculating the average marginal cost of producing a Bitcoin at any given time, based on the block reward, electricity price, mining hardware energy efficiency, and mining difficulty.
How Many Bitcoins Are There?
There are 18,730,931.25 Bitcoins in circulation as of June 2021. The total number of Bitcoins that would ever be there is just 21 million. On average, 144 blocks are mined every day, with 6.25 Bitcoins per block. The average number of new Bitcoins mined every day is 900, calculated by multiplying 144 by 6.25.
How To Create Bitcoin Account?
Firstly, Go to the WazirX website and sign up. Then, a verification mail will be sent to you. The link sent via verification mail would be available only for a few seconds so make sure you click on the link sent to you as soon as possible, and it will verify your email address successfully. The next step is to set up security, so select the most suitable option for you. After you have set up the security, you will get a choice to either proceed further with or without completing the KYC procedure. After that, you will be directed to the Funds and Transfer page, where you could start depositing Bitcoins to your wallet. You can also deposit INR and then use it to buy Bitcoin for your WazirX Bitcoin wallet.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
