No digital currency has the popularity and influence of Bitcoin (BTC). Bitcoin leads the world of cryptocurrency because of the high-profit yield it has generated for certain investors. Many millionaires have been made by merely investing in Bitcoin. In spite of all these advantages, there exist a problem with the currency and that is volatility. Bitcoin has been found to be a digital currency which fluctuates in price and with that problem, its ability to properly operate as a currency is weakened.
There are various reasons why Bitcoin is volatile in nature and in this article, we shall talk about some of them.
The Market Size
It is a known fact that traditional assets like bonds and stocks as well as fiat currencies still have a greater market share compared to digital currencies and anyone planning to invest in bitcoin should know this. It is true that Bitcoin is doing well, as a matter of fact, it’s market capitalization exceeded 300 billion dollars at the end of the year 2017, but that is nothing compared to traditional asset markets. In comparison, the stock market all over the world was already at 76.3 trillion dollars by the middle of the year 2017.
These figures go to prove that smaller markets, compared to bigger ones, are more prone to manipulation. A major investor or smaller investment groups could easily determine the way the digital currency market would go through the investment of their resources.
The issue of liquidity has been a bother to Bitcoin which gives rise its high volatility. Low liquidity can worsen price fluctuations thereby making the possible fall of digital assets much worse than it is supposed to be.
Regulations and Policies
Regulations imposed on Bitcoin also contributes in making it volatile. Ever since the creation of Bitcoin, governments have taken it upon themselves to regulate its use. The US government considers Bitcoin as a commodity and should in effect be regulated by instituted government agencies. A country like China is more aggressive in their regulation of cryptocurrency, and that is by shutting down its operations within their territory.
All the regulatory measures taken by different governments have contributed to Bitcoin’s volatility.
Another determinant of Bitcoin’s price fluctuation is media influence. When there is a circulation of positive news about Bitcoin, it has the effect of encouraging massive investments. This suggests that a large number of people will purchase Bitcoin and in turn, the price of Bitcoin will go up. On the other hand, a negative news about Bitcoin could also affect its price. Upon the announcement of such news, the price of Bitcoin is bound to drop.
Uneven Wealth Circulation
Another reason for the volatile nature of Bitcoin is how unbalanced it’s distribution is. 40% of Bitcoin is estimated to be owned by 1000 individuals, and those individuals could influence the entire Bitcoin market if they choose to, either by selling a portion of their holdings or by coming together to combine forces to change the price of Bitcoin.
The Bitcoin market is a profitable one as many have experienced and will still experience, but that does not rule out its problem of volatility. A lot of factors determine the price of Bitcoin and proper care should be adopted by anyone who wishes to invest in Bitcoin. Conduct appropriate investigations and make sure everything is satisfactory before investing.