What Causes Bitcoin’s Immense Volatility?

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When it comes to bitcoin, price fluctuations are steep and varied. Volatility in Bitcoin does not yet have a generally accepted index since cryptocurrency as an asset class is still in its evolving stages, but we do know that Bitcoin is highly volatile. Bitcoin price fluctuations can be as high as 40% in a single day and they are driven by many factors. In this article we will be exploring some of the biggest factors behind Bitcoin’s volatility:

1. The Press: Media hype can easily lead to an increase in bitcoin price, while negative news can lead to a decline in the price. For instance, news that scare bitcoin users such as breaches in blockchain’s security or funds stolen from bitcoin wallets can cause prices to drop as investors lose their trust in the cryptocurrency. On the flip side, when governments adopt Bitcoin or state that it can be regulated, BTC prices tend to rally.

2. Uncertainty: Bitcoin has properties that make it somewhat similar to a commodity but a far more volatile and a non-tangible one. Its production is limited to a fixed amount of 21 million BTC and it cannot be managed by governments who want to maintain low inflation, high employment, and satisfactory growth. So whenever there is global uncertainty and the forex markets are bearish, investors may choose to allocate more capital into Bitcoin causing BTC prices to rally.

3. Changes in Bitcoin’s Perceived Value: Bitcoin volatility is also driven by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and a method of value transfer. Store of value refers to the the function by which an asset can be saved and exchanged for some good or service in the future. A method of value transfer refers to the extent to which bitcoin can be used transmit property from one party to another. Bitcoin’s volatility at the present makes it a somewhat unclear store of value, but it does promise nearly frictionless value transfer.

4. Government Regulation: Each time a government releases official statements about the regulation of digital currencies, the price of bitcoin is affected. Anytime there are any government imposed restrictions on the use of bitcoin, its price changes drastically. Taxing is also a huge factor when it comes to changes in BTC price. Recent announcements by the IRS stating that the currency is actually an asset for tax purposes have created immense volatility. Generally speaking, any statement recognizing the validity of the cryptocurrency can have a positive effect on the market valuation of BTC.

5. Innovation: Technological advancement and innovations also have the ability to influence bitcoin price. For instance, the integration of bitcoins in PayPal’s payment system has raised awareness and stimulated a lot of interest in digital currencies. Blockstream is another innovation that could provide added functionalities to bitcoins, which may in turn boost BTC prices.

Sources: Investopedia, total bitcoin.org

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