Why Is Bitcoin Price So Volatile and Will It Ever Be Stable?

Bitcoin

A look at the numerous factors influencing Bitcoin prices and what experts have to say about the token’s stability. 

It has been 13 years since the cryptocurrency token Bitcoin was introduced to the world, and it is as volatile as ever. Last year alone, Bitcoin saw tremendous losses that its price plunged 30 percent at one point, along with incredible gains reaching up to 60 percent. The coin reached an all-time high of US$68,000 in November 2021, but its price fell to US$33,000 come January 27, 2022. 

Over the last year, Bitcoin has entered the mainstream, with El Salvador accepting it as an official currency and other countries attempting to incorporate it into their primary financial system. Still, its price continues to fluctuate, and there are, largely, five reasons why:

Government regulations

In October 2021, when China deemed all crypto transactions illegal, the price of Bitcoin fell by 8 percent. When El Salvador announced that it would be adopting Bitcoin as legal tender, the crypto token’s price dropped by 17 percent. In the United States, the CEO and Chairman of blockchain startup, Charlie Silver, says, “The anticipation of Fed (Federal Reserve System) and White House moves, unfortunately, weigh heavily on the market.” All in all, how governments deal with cryptocurrencies severely impacts their prices. 

Dubious classification and regulation

Regulation, or its lack thereof, plays a crucial role in determining Bitcoin prices. The Chief Executive and co-Founder of crypto platform FRNT Financial, Stéphane Ouellette, feels that trying to comprehend Bitcoin’s price fluctuations is an “uncertain exercise”. According to him, that’s because “the market is still deciding whether [Bitcoin] is going to be an alternate financial system or if it’s some kind of a scam.” 

There is a lack of clarity on the classification of cryptocurrency across countries. Given that, there is a demand for regulatory clarity. The Managing Director of trading firm Radkl, Jim Greco, expounds, “There’s still a ton of uncertainty about the future—[cryptocurrency]’s gone so mainstream that we know it has value, but what that value is, I think, is still very much up for debate.”

Supply, demand and their interplay

Bitcoin tokens boast a limited supply of only 21 million coins. As of January 27, 2022, only 10% of these tokens are left to be issued. As we get closer to mining the whole of the 21 million, the price will climb higher, as ‌demand will increase inversely to ‌supply. Later, however, if ‌demand for Bitcoins drops due to the lack of utility, the token’s value will, too. 

In addition to that, once the supply runs out, there will be no real profit from mining as all the coins will have been issued. That’s why everyone will have to compete for ownership, during which the price will fluctuate depending on people’s reactions. 

Investor behavior

Whales are entities that hold significant amounts of a cryptocurrency—enough to cause fluctuations in the token’s value. A single whale, in 2017, had managed to boost the price of Bitcoin to US$20,000 per token. Whales can manipulate Bitcoin prices by placing large buy and sell orders, thus causing the price to rise and fall as per their requirements. The behavior of these whales influences other investors to follow suit, thus impacting Bitcoin’s price. A news report by OKEx sums it up best, “Ultimately, [whales] seek to drive the market, shake out retail traders in panic and capitalize on opportunities to buy relatively cheap coins. For retail traders, and everyone else in between, the choice seems to be between two options: swimming with the tide or against it.”

News and influencers

In February 2021, Tesla CEO, Elon Musk, announced that Tesla had bought over US$1 billion of Bitcoin, thus shooting up the token’s price by 20 percent in a single day. Then, in May, he declared that Tesla would no longer accept Bitcoin payments owing to the coin’s heavy energy consumption, causing the price to fall by 15 percent. The Director of Data And Indexes at a crypto news site, Galen Moore, mentioned, “In cryptocurrencies, it’s as important to understand memes and the social layer as it is to understand the technology and game theory that make Bitcoin a secure network.” He feels that this also raises “uncomfortable questions about price manipulation” in Bitcoin. 

Will Bitcoin ever be stable?

The responses are mixed. Some, like the Former Director Of Research for Fidelity Digital Assets, Ria Bhutoria, feel that Bitcoin’s volatility is a “trade-off for a distortion-free market”. In fact, as per the Portfolio Manager and Founder of Quantum Economics, Mati Greenspan,  volatility is good because it represents lucrative “buying opportunities” for seasoned investors. However, Bhutoria does believe that as Bitcoin’s adoption increases, along with “the development of derivatives and investment products”, the token will stabilize. 

Still, when investing in Bitcoin, experts suggest using less than 5 percent of your total portfolio for high-risk investments, including cryptocurrency, specialized exchange-traded funds (ETFs) and the like. 

Header Image by Pexels

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