Volatility is one of the characteristics that is attributed to bitcoin. Why bitcoin is volatile? The following article will help you in understanding the various reasons behind this phenomenon and its subsequent reflection in the sectors of trading and stock investment. The various parameters of the volatility of bitcoins are also discussed below;
What is meant by the volatility of bitcoin?
Volatility refers to the variation in the price ranges of a particular product or variable over some time. As the volatility increases it is riskier to acquire the investment or the funding needed for the project. Bitcoin is one of the primary areas where this volatility is mainly seen and affected. Inside this, we have got many sub-units like stocks which are highly volatile in nature and bonds which have low volatility.
How this volatility can be measured?
Volatility is generally measured by taking and studying the price variations over a specific period. It is usually thirty days or a year. The future predictions based on the statistical data are termed implied volatility.
Since volatility is the one factor that helps in understanding the investment risk, it is very important to understand its nature from its basis itself. The fact is that investors are still ready to take that high risk if the profit, in the end, will be much higher.
Bitcoin first emerged in the year 2009 and from there onwards it has undergone drastic price changes. There are several factors to take into consideration before going forward with an investment and future financial projects. Assessing the risk elements of the stock market by analysing the volatility of the bitcoin is an efficient way to avoid high investments and it is very important to assess these various parameters too.
Factors that determine the volatility of the bitcoins
- Demand and supply: Just like any other product in the market, the price variation of the bitcoin also changes according to its demand and supply. The more the demand, the more the price. When supply is limited, the demand rises then also. The market value of bitcoin is determined based on how many coins are under circulation now and how many people wanted them and how much they are willing to pay for them. The cryptocurrency is limited to 21 million coins and as they approach closer to the limit, the high is chance for the price of the coins to boost exponentially. Bitcoins are subjected to fluctuations even to any minute actions taken.
- Investor beliefs: Both investor and the user has a significant role in determining the volatile nature of bitcoins. Their specifications matter a lot here. At any given moment, these speculations can significantly affect the price ranges in both positive and negative ways. It is estimated that one-third of the bitcoin is under the ownership of wealthier investors. They aren’t willing to let their bitcoins be exposed to small asset holders. So these wealthier investors play a significant role in determining the volatility of the bitcoins.
- Store of value: Store of value is an asset’s quality that helps in maintaining its value in the future and also refers to its predictability. Investors’ belief in bitcoins that they would surely retain and maintain their value in the future is used as a hedge in promoting investment and stock trading as a precaution against inflation and also to promote bitcoins over gold and other valued goods.
- Bitcoin and media: Media hype is one thing that plays a role in determining the volatility of bitcoin. Rather than the pieces of evidence, the majority of the news outlets work on opinions. Not just opinions, but expert opinions. This is one such drawback of the media. They present opinions rather than facts. This negative media hype will surely affect the stock market exchange. The one thing to be noted here is that in most common cases media works in the support of the wealthiest bitcoin holders and their interests are propagated and protected.
- Government Regulations: The regulations from the government can affect the volatility of bitcoins. Since bitcoins and cryptocurrencies can be seen as virtual money or can be converted into cash, the government is less likely to impose harsh regulations.