Why is Bitcoin so volatile? It’s been around for years now and remains as volatile as ever. While we’re aware that cryptocurrency is still a young currency, that hasn’t really been around that long when put into perspective, we thought it’d be interesting to take a closer look at its volatility, and a few factors that impact it.
This BitcoinCasino analysis and insight will cover the basics of Bitcoin volatility and why it behaves the way it does, but we’ll be taking a second look at it in the future as well, so stay tuned.
Supply and demand
First off, the basic economic principles of supply and demand play a critical role in Bitcoin's price volatility. With a fixed supply of 21 million Bitcoins, any increase in demand could potentially result in a surge in its price, while any decrease in demand can lead to a decline in its value. This creates an environment where small changes in demand can significantly impact the price of Bitcoin.
Technical analysis
The demand for Bitcoin is influenced by various factors, including:
- Mining difficulty: It’s widely known that Bitcoin mining requires a lot of computational power, and more miners are constantly joining the network. This results in new challenges, as blocks become more difficult and expensive to mine.
- Network usage: The more people using the Bitcoin network, the higher the demand for the cryptocurrency. As Bitcoin gains more mainstream adoption, we can expect the demand to rise and the price to increase.
- Halving events: Bitcoin undergoes a halving event every 210,000 blocks, which occurs roughly every four years. During a halving event, the amount of new Bitcoin issued to miners is cut in half. Since this reduces the supply of Bitcoin, the price may increase.
External factors
While technical analysis plays a major role in Bitcoin's volatility, a couple of external factors can also have an impact on its price.
- Regulatory Changes: Governments are still figuring out how to regulate cryptocurrencies. Regulatory changes, such as new laws or bans, will impact Bitcoin's price. An instance where this happened is when China banned crypto exchanges in 2017, dropping the price of BTC by over 30%.
- Market Manipulation: As with any market, Bitcoin is vulnerable to manipulation. Whales, or investors with large amounts of Bitcoin, can influence the price by buying or selling large amounts of crypto. This in turn may cause other investors to panic and sell their holdings, leading to a price drop.
Bitcoin investor sentiment
As you might’ve already noticed, the emotions of investors can cause significant volatility in the Bitcoin market. When they feel positive about Bitcoin's prospects, they’ll likely buy more of it, and communicate more about it, driving up demand and the price.
Conversely, investors feeling pessimistic about Bitcoin are more likely to sell, creating downward pressure on the price. Subsequently, it can lead to rapid and sometimes dramatic price swings.
News events
News events have a powerful influence on Bitcoin's volatility. Any news that covers and affects the perceived value of Bitcoin is going to impact its price, leading to sharp price movements. For instance, news of regulatory crackdowns or major hacks can cause investors to lose confidence in Bitcoin, leading to a sharp drop in its value.
On the other hand, we’ve noticed that positive news, such as the acceptance of Bitcoin by mainstream companies or governments, tends to immediately have the opposite effect, leading to a surge in demand and a corresponding price increase. It never really strikes a balance.
Of course, fiat doesn’t behave this way, which is why Bitcoin and other cryptocurrency feels so incredibly volatile in comparison.