Bitcoin introduced a unique way of facilitating payments among peers more than a decade ago. It leveraged blockchain and sought a more convenient way for users to exchange values. The network continues to thrive on it along with its native token, BTC. However, the flagship cryptocurrency suffers from a major drawback – volatility. It often plays with the sentiments of investors. This happens to the extent that they either lose their funds or make a few quick bucks.
Bitcoin volatility remains a core concept to understand, for it is a foundational principle that ultimately determines how portfolios appear on the books. Over a decade has passed and one question remains – why is the price of Bitcoin volatile? Content that follows attempts to explain that briefly and simply.
Key Factors Influencing Bitcoin Volatility
Some of the key factors that contribute to Bitcoin price fluctuations are supply-demand, regulatory compliance, macroeconomic trends, market liquidity, and technological developments, among others.
Effect of Demand and Supply on Bitcoin’s Price
BTC features limited circulation. Demand and supply play a major role in determining the price of the token. However, demand and supply of the flagship cryptocurrency fluctuate every day. Bitcoin Halving is a part of the factors that affect both aspects of the token. It essentially reduces the number of tokens along with rewards for miners.
Regulatory Impact
Regulatory impact pertains to the adoption and recognition of the legal status of Bitcoin tokens and other cryptocurrencies for that matter. Tides are changing their direction, which is evident from the fact that the Spot Bitcoin ETF has made its way to the market. It has even paved the way for more crypto-related ETFs to enter.
Macro Economic Trends
One can see Bitcoin price fluctuations as and when macroeconomic trends are seen in the book. For instance, a hint about rate cuts by the Federal Reserve has also set the bullish sentiments among investors. It could happen as early as September 2024 by 25 bps. Plus global events are affecting the price of BTC like the Russia-Ukraine war or Israel’s battle with its neighboring nations.
Market Sentiments & Investor Behavior
Market sentiments are either bullish or bearish. The one that prevails helps decide Bitcoin price volatility. Investor behavior includes the willingness to buy or sell the token. Behavior to buy shows optimism and hence, driving prices upward. An opposite scenario showcases the fear of pulling prices downward.
Market Liquidity
Market Liquidity refers to the availability of funds within the ecosystem. It is ideally injected by investors. They fuel the market with funds per their investment methods. It could be a personal investment or the construction of a portfolio based on borrowed capital. The former is more common among individual investors while the latter happens among institutional or large investors. The higher the liquidity, the less Bitcoin volatility.
Technological Development
Technological developments include the development of innovative projects like Lightning Network. It facilitates faster and economic transactions to help upgrade the Bitcoin network. Similarly, it is speculated that the introduction of smart contracts could expand the use cases of the token and help control volatility.
Factors stated above may individually or collectively contribute to Bitcoin price volatility. There is never any specific time for them to get involved and demonstrate their effects.
How to Calculate Bitcoin Volatility?
Bitcoin price volatility is basically the movement one sees in its price on the graph along with the range. While movements are natural for any asset in the trading market, it is the range that ultimately decides the depth of its volatility. Analysts often look to the Bitcoin Volatility Index for reference. It is one of the most used indices in the market, including elements like BitVol, BVOL24H, and VCRIX.
Bitcoin’s daily volatility equals its standard deviation which is calculated by using the below-mentioned formula:
√(∑(Bitcoin’s opening price – Price at N)^2 /N)
Also known as BVIX, the Index uses tradeable crypto option prices and is crafted to showcase sentiments that are prevailing in the market.
Historical Perspectives on Bitcoin Price Fluctuations
The historical perspectives of Bitcoin price fluctuations can be looked at from two separate lenses. The early years range from 2011 to 2017 when the network was in the proof of technology phase. Swings were larger in value and highly unpredictable. The second runs from 2017 to 2021. That is the time when Bitcoin volatility experienced maturity. It transitioned from being the favorite of tech enthusiasts to the holding power of almost every type of investor.
The price of Bitcoin has only increased in both phases. Consideration of Bitcoin Halving helps to understand volatility in a better manner. Slashing the number of tokens in circulation has eventually caused a surge in the price despite cutting mining rewards by half.
Managing Risk in a Volatile Market
Bitcoin price volatility makes it imperative to manage risk. The basic way is to do research and assessment of self-risk tolerance. Divert funds only to a level at which one can recover the losses. Bank accounts should not be hit constantly out of spite. It is also important to research the exchange platform and crypto wallets. Both are crucial in handling the holdings of digital assets.
The idea to review Bitcoin price prediction has often come in handy. It is only important to understand that those projects are for reference and the market can still dangle either way.
Conclusion
Bitcoin has come a long way and is now almost a token that everyone knows about. Spot Bitcoin ETF has fueled its recognition and adoption across the globe – thereby, making it important to learn about Bitcoin price volatility. Managing risks is what follows for Bitcoin traders and investors.
