Why is the Bitcoin Price Too Volatile?

Market Conditions Determine Bitcoin’s Price

There are several reasons why Bitcoin has such a volatile price history. Understanding the factors that influence the market price can help you decide whether to continue investing in it, trading it, or watching it develop.

Key Takeaways

Like most commodities, assets, investments, or other commodities, Bitcoin’s price is highly dependent on supply and demand.

As an asset that is quickly adopted by investors and traders, speculation about price movements plays a critical role in Bitcoin’s value at any given moment.

Media outlets, influencers, opinionated industry giants and well-known cryptocurrency fans can cause price fluctuations by creating investor concerns.

Bitcoin Supply and Demand

Supply and demand affect the price of most commodities more than any other factor. Bitcoin’s market capitalization is primarily influenced by how many coins are in circulation and how many people are willing to pay. By design, the cryptocurrency is limited to 21 million coins, as the circulating supply approaches this limit, it is likely to rise to higher prices.

Bitcoin Investor Actions

The demand for Bitcoin, the most popular cryptocurrency, is increasing because the supply is becoming more limited. Long-term, wealthier investors hold their Bitcoins and prevent those with fewer assets from taking risks. According to the National Bureau of Economic Research, by the end of 2020, one-third of all Bitcoins were held by the top 10,000 investors. 2 Brokers and other financial institutions are working to get approval from the Securities and Exchange Commission for Bitcoin-backed. As more securities are designed, the number held by institutions and large investors will continue to grow.

Bitcoin volatility is also driven to some extent by these investors. It’s unclear how Bitcoin whales will convert their significant positions into fiat currency without affecting Bitcoin’s market price of investors with tens of millions or more of BTC shares. If whales suddenly start selling Bitcoin holdings, prices will drop as other investors panic as well.

Emerging technologies such as decentralized finance and the metaverse can unleash Bitcoin’s staying in the market.

Bitcoin’s volatility is also due, in part, to the changing belief in its usefulness as a store of value and method of value transfer. Value retention is the function of an asset that allows it to maintain its value in the future with a degree of predictability. Many investors believe that Bitcoin will protect its value and continue to grow by using it as a hedge against inflation and as an alternative to traditional stores of value such as gold or other metals.

Bitcoin in the News

Because news and media outlets are businesses that need content for their readers and viewers, they can often present information and predictions that come from “experts” and are not always verified by evidence other than opinions.

It is usual to hear an opinion from someone who has invested heavily in Bitcoin stating that the currency will soon be worth hundreds of thousands. However, much of this media attention and publicity allows influencing Bitcoin’s price to benefit people who own a large number of coins.

When media outlets announced that Proshare was introducing its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks, causing the price to soar above $69,000.

Bitcoin Regulation

Rumors about regulations tend to affect the price of Bitcoin in the short term, but the significance of the effects is still being analyzed and debated.

The opinions of government agencies about cryptocurrency can also affect the price of Bitcoin. For example, the Internal Revenue Service (IRS) considers Bitcoin to be a convertible virtual currency because you can convert it into cash. The IRS also considers Bitcoin to be a capital asset if it is used as an investment vehicle. Additionally, if you mine a Bitcoin, you must report it as income based on its market value on the date you received it.

The tax standing taken by the IRS means that taxes must be paid when you use
. As a result, taxes affect Bitcoin’s market price.

The Chinese government and central bank have announced that all cryptocurrency transactions are illegal in 2021.
Bitcoin mining
resulted in the massive shutdown of cryptocurrency mining farms in the country following a meeting of the State Council’s Committee on Financial Stability and Development in May. Following the publication of the committee meeting, Bitcoin’s price fell to around $29,700 by August 2021 as miners tried to relocate.

Mati Greenspan, portfolio manager and founder of Quantum Economics, said: “Big pullbacks are always scary, but experienced investors tend to see them as buying opportunities.

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