Bitcoin volatility: is it good or bad?

Written by Evgenia Sidorova
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Bitcoin volatility

The price of BTC depends on many factors and its rate on the crypto exchanges changes every day. The volatility of traditional assets can be evaluated with the help of the volatility index, and now we have enough tools to estimate cryptocurrency volatility (including Bitcoin). The BitVol (Bitcoin Volatility) index is a good example of such a tool that is used to determine the expected 30-day Bitcoin implied volatility.

In fact, the rates can fluctuate in either direction. Though we got used to the BTC uptrend we also keep in mind that one day in May 2021 it depreciated by 30%. Why are these movements possible? And why is bitcoin so volatile? Let’s try to find an answer to these questions.

Bitcoin is the beginning of something great: a currency without a state, something necessary and extremely important, but it will take a long time for it to be universally trusted.

Nassim Taleb

Why is Bitcoin so volatile?

Bitcoin is independent of any country or any government, it is not backed by any fiat, and its performance depends on supply and demand. All these statements are true but it would be a mistake to think that BTC is immune to external events and troubles. BTC has already turned into a global phenomenon and is embedded into the global agenda, and any news can influence market sentiment in this or another way.

When news becomes public knowledge, BTC rates move down. But at the same time, this may indicate the development of this market, its steady evolvement and formation. This is confirmed by the fact that the BTC value backs up soon after the news.

Bitcoin volatility

Price of btc is going to breakout. Source: istockphoto

The main factors that make BTC volatile

Subjective utility

The core differences between Bitcoin and any fiat are that the number of BTC is limited from the very beginning of its existence and there is no governance that is able to influence the demand by means of traditional market tools.

The supply is fixed at the level of 21 million and there are no methods to mint more coins, counterfeit, or immobilize them. That’s why its value increases in the opinion of many investors who often regard Bitcoin as an alternative system for allocating money. That’s why their decision to invest often depends on the current situation if economies built on fiats demonstrate ramp-up or collapse.

Doubts about Bitcoin’s future

Though Bitcoin is the most popular crypto in the world, there are serious doubts and concerns about its future. BTC is often considered as a means of hoarding. This is an ordinary practice with the assets whose inherent value is undeniable for all the parties and will unlikely change in the future. This is a strategic reserve that is not affected by negative factors as much as other assets.

At the same time, BTC demonstrates the best qualities as a method of value transfer. It can be transferred to another party nearly effortlessly. This is one of the main reasons why the crypto market reacts so fast to negative news.

Large BTC holders

Bitcoin volatility can be the result of so-called Bitcoin whales’ performance. This is a nickname for those who own at least 1,000 bitcoin and therefore can manipulate and influence the market. Single trades made by such network participants can lead to dramatic changes in the price of this coin annihilating any movements of smaller investors.

Security issues

The security issues are very important as no governmental protection is guaranteed to the network participants. They have to rely on entities with unknown or ambiguous statuses. That is why any information on security vulnerabilities causes a public stir.

Frankly speaking, Bitcoin is safe enough and nobody managed to hack it yet. It is nearly impossible to hack its blockchain but users’ wallets and even crypto exchanges often suffer from hackers’ attacks. A significant example of it is the Yapian Youbit exchange that filed for bankruptcy in 2017 after losing 17% of its assets in the cyber-attack.

The factors that can influence the volatility in future

There are two factors that didn’t play an important role at the beginning and rise of Bitcoin though today they cannot be neglected. It seems that in the future they will become more and more significant.

High-inflation countries

Developing countries like those in Latin America or Africa suffer from a high rate of inflation. They face a deep crisis of the traditional banking sector and as a result, crypto trading volumes increase because citizens of these countries try to protect their assets from devaluation. 

Another key factor that is encouraging people in such regions to use cryptocurrency is the cost of transferring money. The absence of intermediates and third parties helps to make sending money from other countries much cheaper via blockchain than via traditional systems. Crypto allows avoiding additional costs.

It resulted in great recognition of crypto which makes its path to the total introduction into national payment systems. It is no surprise that it was El Salvador that adopted Bitcoin as an official instrument of payment on September 7, 2021. This measure was presented as a way to boost economic development and jobs, though there are lots of skeptics and non-believers in the country and outside who don’t support this initiative.

The bottom line

What causes bitcoin volatility? We have described some of the factors that influence it but there are lots of them in fact. To one degree or another, all of them depend on the coin owners, their attitudes, considerations, and intentions. And manipulation with public opinion often leads to dramatic changes in virtual assets price.

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