When it comes to cryptocurrencies like Bitcoin if there is one thing you can be sure of, it is that the prices can change drastically within a matter of hours. The price fluctuation in cryptocurrencies is quite rampant and it leaves everybody confused as to why it happens so much. The changes in the price of cryptocurrencies is driven by a number of factors.
Now, the volatility of the trading assets in traditional market is measured using the Volatility Index aka the CBOE Volatility Index. The volatility of cryptocurrencies does not have a specific term yet since the cryptocurrency is still in its early stages but what we do know is that Bitcoin has 10 times the potential volatility than the traditional asset classes within a small amount of time.
Among the many factors determining the fluctuation of cryptocurrency prices, here are some of the most important ones that you should know about.
The Perceived Value
One of the reasons why Bitcoin and other cryptocurrencies see a massive change in their prices compared to fiat currencies is the store of value they are perceived to have against the fiat currencies. When it comes to Bitcoin, there are certain qualities which make that cryptocurrency comparable to gold. There is a limited amount of Bitcoin that will ever exist in the world and it is increasingly becoming more difficult to mine the cryptocurrency.
Fiat currencies are different from Bitcoin and gold. They are maintained by governments seeking to keep employment levels high and inflation levels low. They want to maintain satisfactory levels of growth through investments being made in capital resources. This means that the economies that are built with fiat currencies can either show strength or weakness. Compared to the value of the fiat currencies, people may feel inclined to invest more or less in Bitcoin since it affects how much value they feel that Bitcoin has.
Bad Press & Rate Of Adoption
With the increasing popularity of Bitcoin around the world, it was bound to start turning heads and raising eyebrows. One of the reasons why Bitcoin and other cryptocurrencies have become so popular is the fact that they are not regulated by governments. There is actually no central authority that decides on the proceedings of the cryptocurrency landscape.
Due to some bad events taking place, Bitcoin has made quite a few headlines. Some mal practitioners have maligned the reputation that cryptocurrencies have and given more reason for governments to push for regulation.
Coupled with the press leaving no opportunities to instill fear in their viewers to get more and more viewers, the public opinion has caused a lot of shift in the value of Bitcoins several times over the years. This public perception has played a big role in affecting the price fluctuation but it is also being seen as a sign of maturity for the cryptocurrency market. Bitcoin friendly investors who see it for what it is have been adamant when it comes to making their investment decisions.
The value of Bitcoin and other cryptocurrencies has always seen itself rise back up after the slump that followed immediately after big events like the Mt. Gox debacle.
High Profile Losses
One of the most important things to note is that when it comes to the losses that people face and the subsequent news about them amplifies the affect of the volatility in prices for Bitcoin. The scarcity of the total number of Bitcoins increases the value of Bitcoins even after some negative news about it hits the mainstream news but the lift is still hampered by any more negative news about the cryptocurrency. It is a vicious cycle that affects the perception people have about Bitcoin’s long term value.
While there have been early adopters of cryptocurrencies that have shown poor management skills and caused a lot of strain to the reputation of Bitcoin, there are new entrants that are learning from the mistakes of those before them to make their operations better. The overall strength of Bitcoin and other cryptocurrencies is increasing but it still fluctuates because of any negative news about it coming into the mainstream news.
Investors React To Security Breaches
Another reason why Bitcoin’s price fluctuates massively is when someone points out a potential breach in the security of Bitcoins. Whenever someone points out a vulnerability in the system and how it operates, there is a collective effort being made to fix the issues and security breaches. At the same time, the security concerns also cause a lot of the public to become rattled.
Investors that have a lot of stake in the cryptocurrencies start dumping their assets. The flooding of Bitcoin back into the market being exchanged for fiat currency options can drive the price downwards in a matter of hours. This presents an opportunity for a lot of other people to get in on the market by lowering the prices enough for them to invest in them, bringing the prices back up by the time a security concern is addressed.
Large Holders Of Bitcoin
There are a lot of early adopters that managed to get a hold of large amounts of Bitcoins early on. The value of their holdings is well in the millions right now and they do not have a lot of options when it comes to what they can do with their cryptocurrency assets.
There is only a limited number of Bitcoins in the world. The scarcity of the resource makes for a tricky situation for big holders. Liquidating their assets into fiat currency positions can risk moving the market by a significant margin. The little option value for the large holders also exists because the volume of Bitcoin still only resembles nothing more than a small cap stock. There is not enough massive adoption right now to present the large holders with a lot of option value for them.
Cryptocurrencies like Bitcoin present a whole new world of opportunities that did not exist before they came about. While it has not yet managed to convince investors to use it as an alternative currency, Bitcoin still has revolutionized the financial world to a large degree with its promise of frictionless transfer of value.
The volatility is expected to simmer down as things move along and Bitcoin might see better adoption figures in the future.