Anyone who has had an eye on the bitcoin market will probably be wary of the volatile nature that is associated with the price of the cryptocurrency. It is perhaps this very volatile nature that has made the cryptocurrency rank really high, since its price is rising rapidly. However, users won’t react so positively when the volatility of the digital currency pushes prices downwards.
Most users shy away from investing in bitcoins, because they feel that its volatility will leave their investment in tatters. Considering what is at stake, it is best to take a look at factors that influence the volatility of bitcoins.
- Bad Press: The rate of adoption is definitely hindered by negative press. News stories that scare users of this cryptocurrency include statements by governments regarding the regulation of the digital currency and other geopolitical events that impact the currency directly. Some of the headlines that led to the circulation of negative news regarding bitcoins were the bankruptcy of Mt. Gox during 2014, and an increase in the use of bitcoins for drug transactions on Silk Road. The latter ended with a shutdown propagated by the FBI. Both of these events created a ripple effect and drove bitcon’s value down. However many bitcoin investors have hinted that such incidents are evidence for the fact that the market for crypt currencies is genuinely maturing.
- Variance in Perceptions: Another reason behind the volatile nature of bitcoins is the varied perceptions that people host regarding the method of value and the store of value associated with bitcoins. People are unsure regarding the intrinsic value of bitcoins, which eventually fuels the volatility of the cryptocurrency. A store of value is basically the feature by which an asset could be considered to be useful in the future. A store of value can eventually be exchanged for some other good in the future. A method of value transfer is basically an object used for transmitting assets from one party to another. The flawed or incomplete perceptions that people host regarding these concepts are the reason why the value for bitcoins can change over the slightest of issues.
- Finite Nature: The finite nature of the currency has a high impact on its volatility. Since the value of bitcoins is tied with the blockchain, there are only a limited number of bitcoins available in the market. The finite nature of this asset means that there will always be fluctuations in the price. The fluctuations or volatility can either be big or small, but they will keep occurring based on how investors view the currency.
- Tied to User Perception: We talked about this earlier, but there is indeed no real value for bitcoins. The value for this cryptocurrency is decided by the users and if other coins tend to become successful, the price for bitcoins will fall. A currency that has its price mechanism tied to user perception will always experience problems in volatility.