5 Reasons Why Bitcoin Is So Volatile

by Andrew McGuinness     Jul 16, 2019

One of the main factors that has driven potential investors away from Bitcoin and the cryptocurrency market is its volatility. Unlike the stock market, Bitcoin and other cryptocurrencies experience huge price fluctuations that can halve or double even the most careful portfolio’s within a week, or even a single day.

Trading 101 teaches that no investment that is as risky as Bitcoin should be taken seriously, but many have earned millions from smart crypto investing. So what exactly makes Bitcoin so volatile, and will this volatility ever end?

1) Security Breaches Cause Intense Reactions

Unlike many stocks in the stock market, Bitcoin experiences the occasional security breach. These breaches are usually hackings into cryptocurrency exchanges, in which users lose millions of dollars’ worth of Bitcoin to faulty security systems. Whenever these security breaches occur, investors react immediately, pulling out and selling. This causes the price to drop in large degrees in a short amount of time. However, Bitcoin and the cryptocurrency market has generally become safer, with fewer and fewer security breaches occurring.

2) Bitcoin’s Involvement In Countries Experiencing High Inflation

Developing countries with high inflation are known to have adopted Bitcoin much more easily than developed countries such as the US. This is because Bitcoin’s volatility is nothing compared to the volatility of the US dollar compared to their own currency. For example, the Argentine peso is incredibly weak against the US dollar, making Bitcoin’s volatility easier to cope with for Argentinians.

With this lesser volatility also comes the attractive function of seamless cross-border transfers; since Bitcoin is much easier to transfer than fiat currencies, Argentinians regularly use Bitcoin to take loans from those outside of the country, without the risk of having their money lose value in a short amount of time. This heavy adoption causes spikes in Bitcoin’s rise regularly.

3) Confusion Over Method of Value and Store of Value

The world is still experiencing the transition from fiat currencies to cryptocurrencies, and because of this, there is a large amount of variance between how we perceive cryptocurrencies’ method of value versus store of value. Some believe that Bitcoin is better as a store of value, while others believe it can be used better with its method of value.

The store of value is the measure of Bitcoin’s intrinsic value, in which investors invest in it due to the belief that it will have a higher value in the future; the more reliably this can be predicted, the more reliable it is as a store of value. The method of value is how much Bitcoin can be used as an actual working currency. The confusion over whether Bitcoin works better as a store of value or method of value occasionally leads too fluctuations.

4) Bad Press In Bitcoin’s Early Stages

Bitcoin has had to overcome several mountains of bad press as it transitioned from the unknown to the mainstream. With stories of Mt. Gox’s bankruptcy and Bitcoin’s involvement in the drug trade of Silk Road, many mainstream investors have been wary with adopting Bitcoin. However, it has been observed that Bitcoin’s volatility has actually decreased over the last few years, as more and more mainstream investors have chosen to put their trust in the crypto world.

5) Tax Treatment and Government Regulations

Many countries and governments are still understanding the cryptocurrency world, and the implications widespread cryptocurrency would bring about to society. This means that taxes and government regulations are still regularly shifting around the cryptocurrency market, with bans, laws, and taxes being implemented all the time. These updates cause fluctuations in the market, although generally there has been a positive rise in Bitcoin’s value.

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