Many factors influence the spot rate of Bitcoin. These fluctuations on the cryptocurrency exchanges are measured with Bitcoin Volatility Index. The purpose of this index is to track the volatility of the world’s biggest cryptocurrency over different periods.
It’s no secret that Bitcoin’s value trends change quickly, even up to eight per cent over a three-month period.
Bitcoin’s volatility has ironically become the one thing you can almost certainly count on when it comes to the original digital currency. But why is that the case? In this article, we’ll give you a full explanation.
How Did Bitcoin Receive Value in the First Place?
To answer the question of why Bitcoin has value, we must explain why any currency has value. In a nutshell, a currency must be used as a unit of exchange and as a store of value.
Aside from those features, all currencies, including cryptocurrency like Bitcoin, have value because of six important attributes: utility, transportability, scarcity, divisibility, durability, and counterfeit-ability.
Bitcoin has the characteristics of all six features.
One of the reasons so many people find Bitcoin appealing is its use of blockchain technology. It makes Bitcoin a completely decentralized system. It also makes it trustless, as it doesn’t require any of the participants to trust one another for the system to work correctly.
Bitcoin is fully transferable within minutes of making a transaction. The fees are very low, regardless of the amount. Transferability is an incredibly important concept for any currency, and Bitcoin fits into its definition.
Ever since it was launched in 2009, Bitcoin has had a limited number of tokens that could ever be produced. That number stops at 21 million.
As of today, the number of bitcoins mined into existence is over 18 million, with the prediction that it will surpass 19 million by 2022.
However, it’s estimated that the last Bitcoin will be mined somewhere around the year 2140. It’s uncertain what exactly will happen then, but for now, the scarcity factor drives the value.
Bitcoin can be divided up into eight decimals. The smallest unit is called Satoshi, after the original developer of Bitcoin. In general, Bitcoin has a high level of divisibility, often much higher than some of the most stable fiat currencies in the world.
This is another attribute where Bitcoin takes the lead against most national currencies. Physical money, regardless of how well-made, can be destroyed, lost, or become unusable. The lack of a physical aspect makes Bitcoin very valuable.
It’s almost impossible to counterfeit Bitcoin due to its highly complex and decentralised ledger system. The size of the Bitcoin network prevents this from happening as well. It’s not possible to control the majority of the network power and falsify records.
What Causes the Volatility of Bitcoin?
We’ve established that Bitcoin is the same as any other currency in terms of six important attributes. But as it lacks any central authority or governmental oversight, it’s also substantially different.
Most people who are drawn to the idea of investing in Bitcoin appreciate the anonymity and the autonomy it allows. However, the concern over the volatility remains.
Gaining insight into what causes the price of Bitcoin to fluctuate might help you understand how to approach it in the future.
Bitcoin and Bad News
Even though Bitcoin’s reputation has improved, unsettling news still impacts the adoption rate. There have been many headlines over the years suggesting that Bitcoin is somehow unsafe.
Nothing could be further from the truth, however, especially as many new high-profile investors jump aboard. In many ways, this is a path to maturity of the Bitcoin market, as the original cryptocurrency is still in its infancy.
Risks Associated With Large Holders of Bitcoin
One of the leading causes of Bitcoin’s volatility comes from holders who have over £7 million in Bitcoin. What would happen if these investors were to decide to liquidate their positions into fiat currency?
It’s challenging to predict how the market would be affected, especially if they were to do it in a short period of time.
We come back to the issue of whether Bitcoin is safe, but not just in the sense of whether it’s used for criminal behaviour when the Bitcoin community is vulnerable to security breaches, which makes Bitcoin volatile as well.
The open-source nature of Bitcoin gives users the freedom to voice their security-related concerns publicly, and in return, the security can only improve. This has worked really well in the past but has unfortunately impacted the volatility of Bitcoin.
Around 20 per cent of Bitcoins ever mined are lost forever. These losses are mostly an accumulation of more minor losses, but there have been several high-profile losses over the years.
The problem is that these unfortunate events, however, they came about, raise fear among potential and existing Bitcoin investors.
But most of these prominent losses are now in the distant past and have served as a lesson on strengthening the network. Still, the potential for great losses is one reason why Bitcoin is so volatile.
Bitcoin’s Uncertain Future
The six attributes that attest to the validity of Bitcoin as currency are not in question, but the perception of its intrinsic value often is.
Specifically, Bitcoin’s store value has more than one perception in public, which leaves Bitcoin with low predictability of how valuable and useful it will be in the future.
The Strength and Weakness of Bitcoin’s Volatility
While the store value of Bitcoin may still have multiple perceptions, the method of value transfer does not. At present, Bitcoin offers frictionless value transfer. This bodes well for the cryptocurrency’s future.
However, as we see, news events still impact Bitcoin more than any national currency, which can be a cause for understandable concern for many investors.
For now, Bitcoin has managed to ride out every storm and come out victorious, but there are no guarantees. Perhaps Bitcoin’s volatility should be embraced as a natural consequence of a fully decentralised network that is powered by the people.
Hitesh is a digital marketing strategist and entrepreneur with more than 15 years of experience in digital marketing, start-ups, branding, and customer acquisition strategies. Hitesh is the CEO and Founder of Reposition Group, which specialises in digital growth strategies for companies in the cryptocurrency market such as Bitamp.com.