Understanding Market Movements: Why is Bitcoin Volatile?

If you are not a novice to the crypto landscape, you probably know that crypto markets are very volatile, and digital coins can go through significant price swings that can result either in losses or gains. Volatility in the financial markets involves how much the price of a virtual coin can increase or decrease quickly. In general, when an asset is more volatile, it is considered risky, which is why people might be afraid to invest in it. Bitcoin is an excellent example of a highly volatile asset, which can be seen from its history: at first, it was worth almost nothing, but now it has reached values of over $70,000. 

A lot of factors make Bitcoin so volatile, and the fact that it is still a young digital asset is one of them. Bitcoin hasn’t been as much in the market as the aged traditional assets that existed centuries ago, so it is normal for Bitcoin not to benefit from the same stability as other assets. Another reason that leads to the crypto volatility is its fixed supply of 21 million coins, where the scarcity can maximize the price fluctuations, as the demand fluctuates against a limited supply. In this article, we will explore more facts about the volatile nature of Bitcoin, which will help you have a better understanding on when and how to buy Bitcoin. Keep reading to find out more.

What are the factors that make Bitcoin volatile?

Price discovery

Assets and concepts generally take some time to settle and evolve in the market, which also applies to cryptocurrencies. Bitcoin is the first digital currency ever created and has been in the world for around 15 years, but it is still nascent, so it remains at a price discovery stage. Volatility will still be present in the crypto space because prices will continue to fluctuate as new participants enter the market, which could finally help Bitcoin set an established price value. 

Compared with the other traditional assets, Bitcoin is still young, unlike gold and fiat money, which have been in the market for centuries. So, the price of Bitcoin will continue to be volatile and experience changes as users, investors, and governments still deal with initial concerns and growing pains until Bitcoin stabilizes (if it ever does). 

Supply and demand characteristics

Supply and demand dynamics also play an important role in Bitcoin’s price movements and volatility. Bitcoin’s value is affected by the amount of digital coins in circulation and people’s willingness to invest and buy BTC. Bitcoin has a limited supply of 21 million coins, so the prices are expected to increase, and the crypto king’s supply will get closer to its limit. However, even if we know that Bitcoin will reach its supply limit somewhere in the future, it is difficult to predict what will happen next. 

The pressure of the supply and demand dynamics also depends on the large crypto holders, called whales, representing entities or individuals who hold a lot of a specific asset, which can send the price tumbling or soaring. As they have a huge amount of digital coins, they influence the crypto market and the overall experience of regular individuals. 

Bitcoin also experiences volatility because people have started to see the digital coin as a store of value that can increase in value at some point in the future. Some also perceive BTC as a hedge against inflation and an alternative to fiat money. 

Investor sentiment

The crypto market is also impacted by investor sentiment, which is why anyone who wants to make the first steps into the crypto space must research and stay informed. The investor sentiment is more characteristic of a beginner and less informed individuals than of someone with heavy experience and knowledge. The fear of missing out (FOMO) is also present in the crypto landscape, as people hear happy stories from investors who have earned gains during the bull runs, making others enter the market to experience the same thing. As they also spread the news, this might lead to a feedback loop that will result in high but unsustainable demand for cryptocurrencies, leading to significant price movements. 

Lack of regulations

As cryptocurrencies are still young assets, the regulations around them are complex and depend on each jurisdiction. Additionally, up to this day, there are not many countries with a clear and transparent regulatory framework, which is why cryptocurrencies challenge companies and investors interested in virtual coins worldwide. 

News from the media

Media also plays a huge part in Bitcoin’s volatility, where there is a lot of news that is not all very well informed or backed up by evidence, which can make people believe that the BTC price will increase and make them buy it. So, it is not uncommon to hear someone saying that BTC will soon be worth a couple of dollars, even if they don’t have evidence to back up this data. Some investors hype the newly developed digital coins to try to take some of the market share of the largest digital coins. Ultimately, all this media attention influences the price of digital coins, which will be beneficial, especially for the crypto whales. 

Conclusion

The crypto space remains at an infant stage, being relatively immature, underdeveloped, and highly volatile. Cryptocurrencies are volatile assets that bring both opportunities and challenges to investors and traders. But even if Bitcoin is volatile, it is still considered a safer option than the other altcoins, as it was in the space for longer and is the largest digital coin by market cap. Bitcoin is an asset that has taken the financial world by storm for introducing a concept unknown until then. BTC had experienced a massive boom, and even if, at first, people didn’t really offer it a bright future, things have changed, and now Bitcoin is a well-known phenomenon.