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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.
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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.
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Frequently Asked Questions
Can Bitcoin Be Converted To Real Money?
Crypto exchanges, Bitcoin ATMs, Bitcoin Debit Cards, and Peer Peer Transactions are all options for converting Bitcoin to cash. This can be accomplished by using Bitcoin exchanges such as WazirX. A Bitcoin ATM is a real place where you may purchase and sell Bitcoins with cash, unlike standard ATMs that allow you to withdraw money from your bank account. Many websites provide the option of purchasing Bitcoin in return for a prepaid debit card that works similarly to a standard debit card. Through a peer-to-peer marketplace, you may sell Bitcoin for cash faster and more privately.
Is Bitcoin A Good Investment For The Future?
Some investors are afraid of the risks or devastation, but others are very eager to pursue the possibility of profit from a Bitcoin investment. A Bitcoin investment is similar to stock investing, except it can be more volatile.
What Are The Chances Of Bitcoin Crashing?
Two Yale University economists (Yukun Liu and Aleh Tsyvinski) produced research titled "Risks and Returns of Cryptocurrency" in 2018. They looked at the possibility of Bitcoin crashing to zero in a single day. The authors discovered that the chances of an undefined tragedy crashing Bitcoin to zero ranged from 0 percent to 1.3 percent and was around 0.4 percent at the time of publishing, using Bitcoin's history returns to determine its risk-neutral disaster probability. Others claim that because Bitcoin has no intrinsic value, it will inevitably crash to zero. On the other hand, Bitcoin advocates argue that the currency is backed by customer confidence and mathematics.
What Is Bitcoin?
Bitcoin is a decentralized digital currency that may be purchased, traded, and traded without intermediary like a bank. Bitcoin is built on the blockchain, which is a distributed digital ledger. Wei Dai suggested a new kind of money that relies on cryptography rather than a central authority to oversee its production and transactions on the cypherpunks mailing list in 1998. Bitcoin was the first application of that notion. In 2009, Satoshi Nakamoto sent out the first Bitcoin specification and proof of concept to a cryptography mailing group.
How Can I Get Bitcoin?
To begin, go to the WazirX website and register. After that, you will receive a verification email. The link received by verification mail will only be available for a few seconds, so make sure you click it as quickly as possible. This will successfully verify your email address. The following step is to set up security, so choose the best solution for you. After you've set up the security, you'll be given the option of continuing with or without completing the KYC process. Following that, you'll be sent to the Funds & Transfers section, where you can begin depositing Bitcoins into your wallet. You may also use INR to fund your WazirX Bitcoin wallet and then use it to purchase Bitcoin.
Is Bitcoin Trading Is 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 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.
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 Does Bitcoin Technology Work?
The blockchain is the foundation of Bitcoin. It is a decentralized, distributed ledger that tracks the provenance of digital assets. The data on a blockchain can't be changed by design, making it a real disruptor in industries like payments, cybersecurity, and healthcare.
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