What makes Bitcoin so volatile?

Traders are still concerned about the volatility of “Bitcoin”. It is important to know what makes the value of this particular digital currency very unstable. Like many other things, the value of “Bitcoin” also depends on the rules of supply and demand. If the demand for “Bitcoin” increases, then the price will also increase. Conversely, the decrease in demand for “Bitcoin” leads to a decrease in demand. In simple words, we can say that the price is determined by what amount the trading market is willing to pay. If a large number of people want to buy ‘Bitcoin’s, then the price will increase. If more people want to sell ‘Bitcoin’s, then the price will go down.

It is worth knowing that the value of “Bitcoin” can be volatile when compared to more established products and currencies. This fact can be credited to its comparatively small market size, which means that a smaller amount of money can change the price of “Bitcoin” more prominently. This inconsistency will naturally reduce over time as the currency develops and the size of the market increases.

After being shaken at the end of 2016, “Bitcoin” touched a new record level in the first week of the current year. There could be many factors that cause the “Bitcoin” to be volatile. Some of these are discussed here.

The bad press factor

“Bitcoin” users are especially scared by various news events, including the statements of government officials and geopolitical events that “Bitcoin” may be regulated. It means that the adoption rate of “Bitcoin” is disturbed by negative or bad press reports. Several bad news stories create fear in investors and prohibit them from investing in this digital currency. An example of bad news is the eminent use of “Bitcoin” in the processing of drug transactions through Silk Road, which came to an end with the interruption of the FBI market in October 2013. This type of stories produced panic among people and caused the “Bitcoin”. ‘value to decrease a lot. On the other hand, veterans in the trading industry saw such negative incidents as evidence that the “Bitcoin” industry is mature. So the “Bitcoin” started to gain its increased value shortly after the effect of the bad press disappeared.

Fluctuations of perceived value

Another big reason for the value of “Bitcoin” to become volatile is the fluctuation of the perceived value of “Bitcoin”. You may know that this digital currency has properties similar to gold. This is governed by a design decision by the producers of the core technology to limit their production to a static amount, 21 million BTC. Due to this factor, investors can allocate less or more assets in “Bitcoin”.

News about security breaches

Different press agencies and digital media play an important role in building a negative or positive public concept. If you see something that is advertised Advantageously, you can go for it without paying much attention to the negative sides. There has been news about “Bitcoin” security breaches and it has really made investors think twice before investing their hard earned money in “Bitcoin” trading. They become too susceptible to choose any specific “Bitcoin” investment platform. “Bitcoin” can become volatile when the “Bitcoin” community discovers security vulnerabilities in an effort to create a large open source response in the form of security fixes. Such security issues give rise to many open-source software such as Linux. Therefore, it is recommended that the developers of “Bitcoin” should expose the security vulnerabilities to the general public in order to make strong solutions.

The latest “OpenSSL” vulnerabilities attacked by the “Heartbleed” bug and reported by Neel Mehta (a member of the Google security team) on April 1, 2014, seem to have a downward effect on the value of “Bitcoin”. According to some reports, the value of “Bitcoin” has decreased by up to 10% in the following month compared to the US Dollar.

Small option value for holders of large “Bitcoin” proportions.

The volatility of “Bitcoin” also depends on the holders of “Bitcoin” who have large proportions of this digital currency. It is not clear for “Bitcoin” investors (with current shares more than $10M) that how they establish a position that expands into a fiat position without moving the market severely. So “Bitcoin” has not touched the mass market adoption rates which would be important to give an option value to the big holders of “Bitcoin”.

Effects of Mt Gox

The recent high profile damage in “Mt Gox” is another big reason for the volatility of “Bitcoin”. All these losses and the resulting news about heavy losses had a double effect on the instability. You may not know that this reduced the overall float of “Bitcoin” by almost 5%. This has also created a high potential on the residual value “Bitcoin” due to the increase in scarcity. However, replacing this elevator was the negative result of the series of news that followed. In particular, many other “Bitcoin” portals saw the big failure in Mt Gox as an optimistic thing for the long-term prospects of the “Bitcoin”.