Why do Bitcoin Prices Fluctuate So Wildly?

Created to be a decentralized currency, Bitcoin has become one of the most attractive assets for investors in recent years. However, because it has such an innovative and disruptive proposal, many people do not understand its operation or constant price variations.

Bitcoin value fluctuations are often violent—both up and down—but the reasons for this volatility are less clear to market experts and analysts. So, to clear that misconception, we have listed the 7 main reasons that influence this Bitcoin appreciation worldwide in recent years. Be sure to check it out.

What is the Bitcoin value variation?

Bitcoin variation is nothing more than the change in the price of a cryptocurrency unit over a certain period, driven by several factors, as you will see later.

Is there a minimum or maximum bitcoin variation threshold?

The transactions with Bitcoin oscillate the same way as conventional currencies (Dollar, Euro, INR, etc.), investments (stocks, bonds Treasury Direct, etc.), and precious metals (gold, silver). Because of this, there is no standard level or range of variation for this type of currency.

To give you an idea, in mid-2010, a year after its launch, a Bitcoin unit was worth only a few cents on the dollar. In January- February it reached the value of $35,000 and is still rising.

What are the factors for this variation to be so volatile?

There are several reasons why Bitcoin variation is recurrent. We have separated, below, 7 reasons that explain this. Check it out:

1. Worldwide news effect

The effect of the news on Bitcoin is the main factor affecting its value. When there is bad news, the value will go down as investors will sell their position, thinking that the value will continue to go down. On the contrary, if there is good news related to Bitcoin, the value of Bitcoin increases.

In the past, Mt. Gox and Silk Road, the biggest scams related to Bitcoin, negatively impacted the cryptocurrency price. There are many other cases of money laundering and fraud that have caused fluctuations in the price of Bitcoin.

2. Fixed supply and variable demand

The second most important reason why the value of Bitcoin fluctuates is the variable demand in the face of a fixed and limited supply. As you may already know, there can only be 21 million bitcoins; there is no possibility of Bitcoin being managed by varying supply, as with fiat currencies. That way, mining for new Bitcoins will eventually end, and only those units will remain on the market, making them more valuable as the number of investors increases. 

However, the demand changes according to the state of the economy. Since Bitcoin is considered a store of value, like gold, many people invest in Bitcoin during times of economic instability. This instability can cause significant fluctuations in the value of Bitcoin.

3. Floating value

Bitcoin has a fluctuating value, being established by the actions of buyers and sellers themselves. That is, there is no interference from a specific financial agency or a country’s government.

Although it has proven reliable over time, Bitcoin has exposure to fluctuations related to the foreign exchange market, having its price established by the direct relationship between supply and demand.
There is also the belief that its price can rise to unlimited heights and surpass the dollar value with a predicted value of  $66,000 by the end of 2021.

4. Uncertainty about its future worth

No one can say for sure what the future value of Bitcoin will be. Since Bitcoin is considered a store of value in times of economic instability, people always try to predict its future value.

But it is not possible to predict this due to the present volatility of Bitcoin. There are no certain factors that we can rely on to predict the value of Bitcoin. It depends on many random factors like the news, financial crises, etc.

5. Fear of loss

While Bitcoin is the most valuable and trusted cryptocurrency, there is a fear of loss due to the high-profile losses it witnessed in the past when its prices rose and fluctuated without any range. Traders and investors fear that they will not be able to cope with losses.

Most investors consider Bitcoin a speculative investment and they fear losing their money in the market. However, governments are taking the necessary steps to develop appropriate infrastructure for Bitcoin and other cryptocurrencies.

6. Security flaws

Another reason for Bitcoin’s volatility is security flaws. When any security vulnerability is exposed or discussed in any Bitcoin community, Bitcoin fluctuates.

The open-source platform allows Bitcoin miners and users to think about the Bitcoin algorithm and source code. People express their concerns in various Bitcoin communities, which is one of the main causes of the currency’s volatility.

7. Independent of a country’s economy

Cryptocurrencies like Bitcoins are strings of data encrypted with technology that have an exchange value in the market. Unlike a traditional currency such as the dollar or INR, Bitcoins are not issued by a centralizing authority like the Reserve Bank Of India.

This makes the currency rate not directly exposed to a country’s monetary policy, usually determined by factors such as the rate of inflation or the pace of economic growth.

Final thought

Over the past few months, the popularity of bitcoin has grown a lot, mainly within institutional investors, such as MicroStrategy, Tesla, Paypal, Square, and JP Morgan. They consider cryptocurrency as an asset that can be an ally against inflation and provide good gains with its appreciation. The entry of these giant and reputed companies in the bitcoin market made it one of the significant investments with the highest profitability that can grow more in the upcoming years. 

Considering all the factors mentioned that can affect the price of bitcoin, it is certainly clearer that changes in the price of the asset do not happen due to mere speculation. Therefore, it is essential that, when deciding to sell or buy bitcoins, you look carefully and analyze the given factors to make the best possible decision during market fluctuations.

The post Why do Bitcoin Prices Fluctuate So Wildly? appeared first on WazirX Blog.

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