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Why is Bitcoin so Volatile?

Bitcoin has become a widely discussed topic among investors, traders, and economists. It is known for its volatility and has been the focus of much debate in recent years. While some see it as an investment opportunity, others are wary of its potential to swing wildly in value. Despite this, many still see Bitcoin as a valuable asset that can be used for quick profits and long-term investments. Therefore, it is important to understand why Bitcoin is so volatile before taking any risks by investing in it.

bitcoin volatility
bitcoin volatility

Bitcoin Implied Volatility

With its growing popularity over the last decade, Bitcoin gained notoriety for being unpredictable and highly influenced by digital social factors such as social media rather than economic reasons. However, don’t get us wrong; macroeconomic factors are still key to Bitcoin’s stellar price increase that peaked at an all-time high of $68,789.63.

As it’s contrary to traditional financial instruments such as FIAT, Bitcoin is atypical to most investment classes. Moreover, its implied volatility makes it a risk-on asset simply because it presents a great deal of risk for institutional investors.

Nonetheless, the data shows that Bitcoin is the best-performing asset of 2023. In the long term, its volatility makes BTC and other digital currencies appealing to investors as either a store of value or a short/long-term investment opportunity.

Changes in Investor Sentiment as a Volatility Driver

The cryptocurrency industry has generated great returns for users. However, it’s often regarded as building on the greater fool theory, where the value of Bitcoin is derived from what investors or other buyers set it at.

With that, Bitcoin is directly impacted by how the general market sees the asset as a whole. During bull runs, retail investors FOMO into the cryptocurrency as they’re driven by a general sentiment of greed, which tends to turn sour during bear markets.

However, as investors continue to address the public and make predictions on the price of Bitcoin and the longevity of the market, it ultimately affects how retail users perceive Bitcoin as a while. This makes Bitcoin fluctuate between extremes – for example, Elon Musk mentioned DogeCoin during the SNL appearance making the price of DOGE skyrocket and then dump

Regulatory Developments Affecting Bitcoin Volatility

Regulatory pushback is another part of Bitcoin’s volatility because it creates uncertainty in the market. While any type of financial regulation is good for protecting investors, regulating a decentralized asset breaks what it stands for.

Not only that, users will be subjected to the same ideal (taxes and governmental control) that Bitcoin was created to counteract.

The lack of regulation makes Bitcoin highly volatile because it allows any actor to dictate the price of Bitcoin in any online circumstance.

Lack of liquidity, hacks and faulty exchange can affect the stability of the Bitcoin economy as it shows its vulnerabilities.

Price Manipulation Affecting Volatility

Without market watchdogs that can identify speculation and pump and dumps, Bitcoin is subjected to high volatility swings. Although a complete takeover over the Bitcoin network is improbable, users and market makers can still affect the price of Bitcoin with a few actions. For example, look at the FTX scandal or the LUNA fiasco, which showed how bad actors can affect the overall market due to tangible actions that would not always directly affect Bitcoin.

Whales are another part of the general Bitcoin economy since any asset movement, regardless if it’s within their own wallets, can create price ripples in the network. So what we’re saying is that without any transparency and motives, large players can play market makers can drive the price of Bitcoin up and down – to a certain extent.

Mining Bitcoin

Bitcoin mining is required for new Bitcoins to become available and verify transactions. As Bitcoin becomes more expensive and relies on expensive equipment, the mining industry has become a profitable but pricey necessity.

We’ve seen that Bitcoin cannot reach its full potential during bull runs, and not only because miners are dumping a lot of their tokens into the market to profit. This causes the market to slow down as miners profit from their year-long mining efforts to pay back or acquire more ASIC miners. So the greater the difficulty, the harder it will become to mine a Bitcoin, and the harder it will become profitable from Bitcoin.

Market Diversification

New and existing tokens always appear, increasing the regulatory risk and competition for the all-mighty Bitcoin. In addition, we’ve seen instances where the “flippening” is projected to occur, which means that Ethereum will overthrow Bitcoin in terms of market capitalization. While that’s not going to happen in the near future, it does create FOMO in the market, which leads to price declines and liquidity being taken out of the market.

Future of Bitcoin volatility

Bitcoins trademark is its volatility, and even though investors are aware of the sharp downturns, we’re still seeing banks and other financial institutions embrace Bitcoin and other cryptocurrencies.

Bear and bull runs are part of the market cycles; however, Bitcoin is not for the ones that cannot stomach sharp declines of 20-30% or even longer bear markets of up to 90% losses. Bitcoin’s volatility will continue despite ongoing regulation because regulation of a decentralized asset is only partly possible.

Vlad Hategan
Vlad Hategan - NFT Gaming Specialist
153 Articles

Vlad has been active in the crypto space since early 2013 with a hands-on approach since late 2017. His focus has always been being able to showcase the value crypto brings to our digital landscape. That's why he tried almost every possible category from mining to NFT and ICOs - back in the day. In short, he enjoys every part of the blockchain space, from the community to the nitty gritty technological details.

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Reviewed and Fact Checked by Eugene Abungana , Investment Analyst, Financial Analyst, and Institutional Trader