Ever since Elon Musk called Bitcoin ‘a good thing’ in a discussion on a popular audio chat app, the digital currency’s price has soared to a whooping £27,000, which is more than seven times its worth in March last year.
Although many financialists agree with Elon Musk and believe that Bitcoin could soon replace gold as its store of value, there are those who have reservations about investing in this cryptocurrency due to its volatile nature. A currency whose price fluctuates 10-15 percent every day can be a cryptocurrency user or trader’s worst nightmare. To unravel the mystery behind Bitcoin’s volatility, we must first understand what it is and how it works.
Below you can find everything you need to know about Bitcoin!
What are Bitcoins?
Bitcoin is a virtual currency, also described as a cryptocurrency or digital currency. The term cryptocurrency means that it does not have a corporeal existence; instead, it exists only on the computer. It was created in January 2009 by the mysterious pseudonymous Satoshi Nakamoto. The identity of the person or group of people who created this cryptocurrency remains unknown to the public even today.
Although initially, Bitcoin was under fire for its use in illegal transactions and unethical trading practices by exchangers, its popularity is growing gradually, and many companies are beginning to accept it as a viable form of currency. According to research published by the University of Cambridge, in 2017, between three to six million unique users using a cryptocurrency wallet were mostly using Bitcoin. Even the world-recognized online payment service PayPal recently announced that it would allow Bitcoin transactions.
How Does Bitcoin Work?
Since Bitcoin is a virtual currency that you cannot stack in your wallet, its creators formed an alternative! Each Bitcoin is stored on a digital wallet like a computer file. You can access this digital wallet through an app on any computer or smartphone. Like cash, you can use a Bitcoin, or part of one, for your everyday transactions, such as buying groceries or refueling your vehicle. Others can send Bitcoins to your digital wallet as well. Since Bitcoin is a decentralized broadcasted currency, it does not have a central bank, so the Bitcoin network employs a public ledger, known as the blockchain, to record every transaction. Network nodes confirm all transactions through cryptography and record them in the blockchain. By keeping a track record, the blockchain prevents people from making copies of Bitcoins and spending money they do not own. You can also buy it through a process known as mining, in which you set up powerful computers to process other people’s transactions. However, this process is time-consuming; it could take years before you get even a single coin, and by then, you would have spent more on the electricity bill due to your computer usage than the Bitcoin would be worth.
Why Does the Bitcoin Market Fluctuate So Much?
When talking about cryptocurrencies like Bitcoin, the only thing guaranteed is that the price will change drastically within a matter of hours. Due to the precarious nature of every digital currency, Bitcoin’s price also fluctuates rampantly. The reason behind its fluctuation is that Bitcoin’s future as a viable form of currency/store-of-value is still uncertain.
The Volatility Index is a measure of future price fluctuations in the price of Bitcoin against USD. Since the cryptocurrency is still in its beginning stage, there is no official Bitcoin price yet, so companies like CBEO make a composite index price available.
Bitcoin has ten times the potential price volatility than the traditional asset classes within the same period. Here are a few reasons why the Bitcoin market fluctuates so much:
The Assessed Value
The perceived store-of-value of Bitcoin against fiat currencies and gold can explain its chaotic fluctuation in price. Certain qualities make Bitcoin comparable to gold: only a limited amount of Bitcoin exists in the world, and with time, it is becoming more tricky to mine the cryptocurrency.
Fiat currencies differ from both Bitcoin and gold. They are issued by the government, resulting in centralized control over the economy as the central banks decide how much will be printed. Their main goal is to maintain a satisfactory growth level through investments in capital resources, which means that economies built with fiat currencies can either show power or infirmity. Bitcoin, on the other hand, is decentralized. There is not any central authority, like a government or bank, that decides the activities of the cryptocurrency landscape. Due to global inflation over the years, more and more people are losing trust in their banking systems and looking for substitutes to store value: Bitcoin is one popular solution.
Prominent Losses
The misfortunes that individuals face in the market and the resulting news enhances the instability in costs for Bitcoin. While early adopters of advanced monetary standards have shown powerless organization capacities and laid a load of strain on the remainder of Bitcoin, some new contenders are acquiring from the mistakes of those before them to improve their exercises. The overall strength of Bitcoin and other computerized types of cash is extending, yet it changes because of any negative news making headlines.
Financial specialists React To Security Breaches
Another occasion when Bitcoin’s cost changes extraordinarily is when someone questions the security of Bitcoins. At whatever point someone points out a shortcoming in the structure and how it functions, a lot of effort is made to fix the issues and security breaks. However, At the same time, security concerns moreover cause the general public to get shaken. Speculators that have a ton of stake in the cryptographic forms of money begin unloading their resources. The flooding of Bitcoin back into the market for trade with fiat currencies can drive the cost downwards surprisingly fast.
Enormous Holders Of Bitcoin
Many adopters got a hold of large amounts of Bitcoin. The value of their Bitcoin is in millions, and they do not have many options when it comes to what they want to do with their cryptocurrency. As a result, there is just a set number of Bitcoins on the planet. The shortage of the asset makes for an exciting circumstance for huge holders. Exchanging their resources into fiat money positions can change the market by a critical edge.
Awful Press and Rate Of Adoption
Bitcoin has made many features on news covers due to some unfortunate events. Some financial experts have insulted the standing that digital forms of money have and pushed governments against its use. Conspiracy theories and unsubstantiated news about the digital currency result in its price rising and falling by over ten percent on a single day. Even though Bitcoin is an upgrade from fiat currency and gold, objectively speaking, it will not hold substantial value unless people adopt it universally. The reason behind this is network effects: a good’s price increases as the number of people using it increases. So, as more and more people will use Bitcoin to make transactions regularly, its value will increase, and eventually, it will stabilize and become a viable store-of-value. Until mass adoption, we will have to get used to the wild price swings.
The Takeaway
Digital currencies like Bitcoin present a completely different universe of chances that did not exist before they came to fruition. Although no one has figured how to persuade speculators to utilize it as elective cash, Bitcoin continues turning the financial world upside down, with its guarantee of frictionless exchange of significant worth. As the world hops on to its use, Bitcoin will see better reception figures, and volatility will be replaced by stability.