This is more than twice the volatility of bitcoin in the day period ending January 15, But why is bitcoin so volatile? Here are just a few of the many.
Table of contents
- Why Bitcoin Has a Volatile Value
- Why Bitcoin Has a Volatile Value
- Related Stories
- (1) Fear of missing out
Still, it wasn't until PayPal adopted bitcoin that prices began to rocket higher. The company announced on October 21 that it would allow its hundreds of millions of users to buy, sell, and hold bitcoin. The token leaped to its highest level since July as investors saw the adoption as a key step forward for bitcoin's widespread use.
The subsequent rise in bitcoin prices then pulled institutional investors into the fray. Fund managers who previously balked at the token and its violent price swings feared they were missing out on strong returns and began shifting some cash into the cryptocurrency.
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Institutional investors have since pushed billions of dollars into the cryptocurrency market. Their involvement has played the biggest part in the token's meteoric rise through the end of , according to Douglas Borthwick, chief marketing officer at digital-asset trading platform INX.
People are going to leave your fund," Borthwick told Insider. Bitcoin may first seem completely disconnected from the coronavirus pandemic, but the health crisis' fallout has played a critical role in supporting token prices. Governments around the world passed several trillion dollars worth of fiscal stimulus to pad against the pandemic's economic damage. The influx of fresh currency and easy monetary conditions boosted the case for bitcoin as a hedge against inflation, JPMorgan analyst Nikolaos Panigirtzoglou said in November.
A limited supply of 21 million tokens and insulation from policy decisions saw the token serve as an alternative to gold and other hedge assets. Companies and institutional investors warming up to bitcoin has given legitimacy to an asset recently known more for its murky uses than its investment potential. During the token's rally, those less familiar with cryptocurrencies associated them with "nefarious activities," Borthwick said.
PayPal's adoption and the influx of institutional funds lend bitcoin new legitimacy and interest among retail investors, Borthwick added. Expert Views.
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Why Bitcoin Has a Volatile Value
Font Size Abc Small. Abc Medium. Abc Large. ET Spotlight Special. The cryptocurrency market has continued to witness a boom despite the global pandemic wreaking havoc on all significant economies on the planet. Many crypto startups have emerged in the space during this pandemic to cater to the ever-increasing demand for Bitcoin and alike cryptocurrencies. Read More News on bitcoin price cryptocurrency covid 19 cryptocurrencies market Cryptocurrency's Price bitcoin Bitcoin currency.
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Why Bitcoin Has a Volatile Value
More recently, a volatility index for bitcoin has also become available. Known as the Bitcoin Volatility Index, it aims to track the volatility of the world's leading digital currency by market cap over various periods of time. Bitcoin's value has been historically quite volatile. This is more than twice the volatility of bitcoin in the day period ending January 15, Here are just a few of the many factors behind bitcoin's volatility. News events that scare bitcoin users include geopolitical events and statements by governments that bitcoin is likely to be regulated.
Bitcoin's early adopters included several bad actors, producing headline news stories that produced fear in investors. Headline-making bitcoin news over the decade or so of the cryptocurrency's existence includes the bankruptcy of Mt. Gox in early and, more recently, that of the South Korean exchange Yapian Youbit.
Related Stories
Other news stories which shocked investors include the high-profile use of bitcoin in drug transactions via Silk Road that ended with the FBI shutdown of the marketplace in October All these incidents and the public panic that ensued drove the value of bitcoins versus fiat currencies down rapidly. However, bitcoin-friendly investors viewed those events as evidence that the market was maturing, driving the value of bitcoins versus the dollar markedly back up in the short period immediately following the news events.
One reason why bitcoin may fluctuate against fiat currencies is the perceived store of value versus the fiat currency. Bitcoin has properties that make it similar to gold.
(1) Fear of missing out
It is governed by a design decision by the developers of the core technology to limit its production to a fixed quantity of 21 million BTC. Since that differs markedly from fiat currency, which is dynamically managed by governments who want to maintain low inflation, high employment, and satisfactory growth through investment in capital resources, as economies built with fiat currencies show signs of strength or weakness, investors may allocate more or less of their assets into bitcoin.
Bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer. A store of value is the function by which an asset can be useful in the future with some predictability. A store of value can be saved and exchanged for some good or service in the future. A method of value transfer is any object or concept used to transmit property in the form of assets from one party to another.
As a result, we see that bitcoin's value can swing based on news events much as we observe with fiat currencies. Bitcoin volatility is also to an extent driven by holders of large proportions of the total outstanding float of the currency. Indeed, it may not be clear how they would liquidate a position of that size in a short period of time at all, as most cryptocurrency exchanges impose hour withdrawal limits far below that threshold. Bitcoin has not reached the mass market adoption rates that would be necessary to provide option value to large holders of the currency.
Bitcoin can also become volatile when the bitcoin community exposes security vulnerabilities in an effort to produce massive open source responses in the form of security fixes. This approach to security is paradoxically one that produces great outcomes, with many valuable open source software initiatives to its credit, including Linux. Bitcoin developers must reveal security concerns to the public in order to produce robust solutions. It was a hack that drove the Yapian Youbit to bankruptcy, while many other cryptocurrencies have also made headlines for being hacked or having stashes of cryptocurrencies stolen.
Bitcoin and open source software development are built upon the same fundamental premise that a copy of the source code is available to users to examine. This concept makes it the responsibility of the community to voice concerns about the software design, just as it is the responsibility of the community to come to consensus about modifications to that underlying source code as well. Because of the open conversation and debate regarding the Bitcoin network, security breaches tend to be highly publicized. It is worth noting that the aforementioned thefts and the ensuing news about the losses had a double effect on volatility.
They reduced the overall float of bitcoin, producing a potential lift on the value of the remaining bitcoin due to increased scarcity.
However, overriding this lift was the negative effect of the news cycle that followed. Notably, other bitcoin gateways looked to the massive failure at Mt. As early adopting firms were eliminated from the market due to poor management and dysfunctional processes, later entrants learn from their errors and build stronger processes into their own operations, strengthening the infrastructure of the cryptocurrency overall.