Bitcoin's Volatility Creates New Opportunites For Active Traders

Volatility refers to how much the value of an asset increases or decreases over some time. Typically, the more volatile an asset is, the riskier it becomes.

Bitcoin is widely regarded as the most volatile asset in the world. Though it became a thing in 2009, it wasn't until 2010 that Bitcoin started its rise to global domination. With several individuals and organizations now adopting its use in their everyday lives, Bitcoin is becoming one of the most important asset classes.

Like other assets, Bitcoin is also prone to changes that affect its price. These changes are what make it so volatile. Over the last 12 years, the average bitcoin volatility index has moved from 6.21%, 2.49%, and 4.56% (as of 2021) - occasionally fluctuating so sharply within hours.

Why Is Bitcoin So Volatile?

What factors make it the most unpredictable non-derivative asset in the crypto market?

The answers to these questions might come in handy when deciding whether to invest in Bitcoin or continue to watch on the sidelines.

Factors That Cause Bitcoin Volatility

1. Supply And Demand

Like most financial assets, Bitcoin’s volatility is heavily influenced by the supply and demand for bitcoin. The value of Bitcoin is affected by how many coins are circulating and the amount of money people won't mind paying for it.

Did you know that the foremost cryptocurrency can never be more than 21 million coins? The closer the supply gets to this figure, the higher the demand for it, and hence, the higher prices often surge.

2. The Investors

While the demand for Bitcoin plummets, the supply grows thin.

Bitcoin whales - wealthier investors with BTC holdings worth millions of dollars- hold on to their bitcoins, and when they are finally ready to sell, the price often tends to go in the direction they choose due to volume.

According to statistics from the National Bureau of Economic Research, one-third of all Bitcoins were held by the top 10,000 investors at the end of 2020

Besides trying to win the more significant stakes against small-time investors, investors hold on to bitcoin as they see it as a store of value and a hedge against inflation.

3. The Media

News and media outlets often present forecasts from experts to provide content for the public. The problem is that most of these "experts" claims rely heavily on personal opinions rather than actual verified evidence.

The predictions of a swift change in the market price of bitcoin and ads of newly launched cryptocurrencies claiming to have more value than Bitcoin can suddenly influence the prices, leading to either a jump or a fall in crypto market prices

Just ask the founders of Proshare's Bitcoin Strategy Emergency Traded Fund, who experienced a boost at the onset of their launch but suffered a decline after the hype died down.

4.  Governmental Regulations

New regulations placed on cryptocurrency by the government and designated bodies can have a tremendous impact. In many developed countries, Bitcoin is embraced as a convertible virtual currency and the future of financial assets. Moves like this often lead to a sudden source of excitement or panic, which influences the immediate price of the asset.

However, the Chinese government and the Central Bank of Nigeria deemed Bitcoin and all forms of digital currencies illegal in 2021. Due to the volume of crypto-related going on in China and Nigeria, these events also led to a substantial decline in the prices of Bitcoin to around $29,700 as of August 2021.

Comparing The Volatility Of Bitcoin To The Traditional Market

It is agreed that Bitcoin is far more volatile than traditional currencies. Bitcoin still holds many advantages over the conventional market despite this glaring fact.

These include;

- Bitcoin is decentralized, allowing it to function independently, and is cheaper as certain costs like transaction fees are eliminated. This contrasts with fiat currencies which rely on central banks, commercial banks, payment channels, and other intermediaries to run effectively.

- Bitcoin isn't bound by sovereignty.

Another way of saying it is that the value of Bitcoin isn't governed by a particular political or economic condition of a country.

Finally, analysts often cite the infancy level of Bitcoin as another contributing factor to the volatility. Let’s face it; cryptocurrency has only been around for a short time compared to other major asset classes.

It is still in the price discovery phase, which means that prices will continue to fluctuate as investors, traders, miners, and government agencies work through regular changes in its utility, technology, and public acceptance until prices become more stabilized.