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Why Bitcoin Is Highly Volatile And How Skilled Investors Benefit From It

KEYNOTES

  • Bitcoin’s price volatility is an innate quality and won’t disappear any time soon, if ever.
  • Its decentralized nature, supply & demand, news reports, and most recently, social media trends are reasons for its erratic price fluctuations.
  • Despite its volatility, investors can still strategically make the best of their investments.

Still fantasizing about becoming a billionaire through Bitcoin investment? Tell that to the digitalized asset holders after Wednesday.

The incredible 30% plunge down in its value versus USD saw it fluctuate around $30,000. The first time it had ever recorded such value since January, Ycharts can reveal.

Bitcoin price chart depicting retracement | Photo by Maxim Hopman on Unsplash

While the massive retracement proved answered prayers for seasoned investors, the overwhelming sell-off was excruciating for Bitcoin holders at the time.

Some holders foresaw this coming following news of China cracking down on banks completing crypto transactions but could have never been so pessimistic of the ultimate result. Telsa’s decision to stop accepting Bitcoin as a form of payment also exacerbated the price fall.

Bitcoin’s volatility has undeniably stunned even the most experienced of market experts. And although the reason behind such intrinsic quality seems quite lucid, it’s still a bitter pill to swallow in times like this.

As a prospective Bitcoin holder, should you always prepare for the worst? How should you respond when the price massively fluctuates against your favor? Why does it even fluctuate that much?

Why Bitcoin Price is Highly Volatile

Hand holding a phone with bitcoin’s price chart on the screen | Photo by Austin Distel on Unsplash

As novel as Bitcoin’s significant price volatility may seem for naive investors, it has contrarily been so since its creation. For instance, between March and July 2011, Bitcoin’s volatility hit 16%, crashing to $0.01 per coin. This is even, unfortunately, more than twice its current peak value at 6.42%.

Several factors have proven responsible for this volatility, but below are the most notable ones verified by market experts.

Bitcoin’s Decentralized Nature

Unlike fiat currencies that central banks dynamically manage, Bitcoins are mined, issued, traded, and stored using a decentralized ledger system called a blockchain. Miners reach consensus by verifying awaiting transactions to secure this system but have no power to alter them.

This lack of authority means no one can guarantee a minimum valuation through necessary measures leaving Bitcoin in its price discovery phase since its initiation.

Limited Supply & Varying Demand

At the outset of Bitcoin’s creation, the pseudonymous creator(s) set its maximum supply at 21 million. This parameter which no one, not the government, hackers, or even the creator(s), can now change, means that when it reaches this threshold, there can never be more in existence — no recreating nor duplicating.

Although the periodic halving designed to make its mining slow over time means the last Bitcoin won’t be mined till 2140, it can create scenarios where demands exceed supply. It drives up the price as a result which can conversely go the other way with massive sell-offs and low adoption.

News & Social Media Influence

Among the disadvantages of Bitcoin still being a nascent asset is the high susceptibility of its investors to news reports & social media trends.

While awful news always hurts its adoption rate, good news does the opposite, ultimately affecting Bitcoin’s price in both ways. The most recent scenario also aforementioned was the news of China cracking down on banks completing crypto transactions. The ensuing public panic among investors was a significant reason behind the drastic fall in Bitcoin’s price versus fiat currencies.

“It’s this weird new thing where viral social trends, like Wall Street Bets or Elon Musk, for example, have a huge influence over crypto,” 

says Ollie Leech, learn editor at CoinDesk. “If Elon Musk put hashtag Bitcoin in his Twitter bio, it sends Bitcoin up 10%,” he continued. Such exponential spikes have proven temporary and usually back to correct themselves most times, yielding irregular price fluctuations. 

Even though crypto experts have continuously warned against following such trends, bitcoin investors can hardly help it.

Small Market Capitalization

Generally, the smaller the asset’s market cap, the more volatile it will be and vice versa. It is a result of massive sell-offs or adoption by investors.

With its market cap now sitting around $747 billion, confirmed by Coinmarketcap, large market entrants or outgoers, both potential and present, can immensely affect the price at any time. Unlike gold which has a highly stable value owing to its large market cap averaging $12 trillion.

An instance was when Telsa announced that the company had invested $1.5 billion in Bitcoin. The price surged up to $44,000 per coin, more than 52 percent of its value in January, according to CoinDesk.

Bitcoin just clocked 11 years of age and may still have enough time to mature. But for now, its relatively small market cap value will always cause price oscillations.

How Bitcoin Investors Can Benefit from its Price Volatility

Man thinking | Photo by Kazi Mizan on Unsplash

Since most factors that cause Bitcoin’s price fluctuations are independent, there’s no telling how long it will last. It’s best to get used to it and pragmatically make the best of it.

HODLING Bitcoins is one of the most popular ways investors benefit from its value volatility. It’s a buying-and-holding strategy, where investors try to purchase them at their least possible price and sell them after some time at their perceived highest possible price. This method aims to evade Bitcoin’s value short-term volatility and gain returns on liquidation after the value appreciates.

Investors also earn massively, thanks to Bitcoin’s price fluctuation by day trading. It is a trading strategy where investors enter and exit positions on the same trading day. It may require more shrewdness and familiarity with the market than usual but can effectively yield huge returns.

CFD trading is another option for investors looking to turn Bitcoin’s volatility to their advantage. In this method, Investors speculate on the market price instead of taking its ownership. If an investor opens a long position and Bitcoin increases in value, the investor will profit, but if the price falls, the investor loses.

Risk Management

There are no hard-and-fast rules to benefit from Bitcoin’s price fluctuation. Diverse perceptions and sentiments from crypto experts have proven multiple ways to leverage its volatility, but they all have one thing in common – risks.

It is noteworthy that the more volatile the price of an investment is, the more risk investors take on by investing in it, and Bitcoin is no different. It also means the higher returns they possibly stand to gain, but it is essential investors meticulously handle risk management to avoid staggering losses.

Conclusion

“Bitcoin has no fundamental [price], and will never have,” wrote Jay Adkisson, author of The Great Bitcoin Scam.

Volatility is just an innate attribute of Bitcoin that won’t disappear any time soon, if ever. Its decentralized nature, supply & demand, news report, and most recently, social media trends are responsible factors, although advocates argue that they are also the reasons that makes it highly valuable.

Getting used to these price fluctuations is pivotal to make you strategically plan investments to minimize losses. HODLING, day trading, and CFD trading are expert-proven strategies while meticulously managing risks.

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