What triggers Bitcoin volatility? Volatility gives rise to trading opportunities, but only if you understand what leads to the volatility and how best to predict it. In this article, we will have a look at the 6 main reasons for the unpredictable nature of cryptocurrencies.
January 22, 2021 | AtoZ Markets – Volatility is the rate at which an asset’s value has changed over a given period. It is usually measured by the volatility index. However, there is no such generally accepted index for Bitcoin yet, because this asset class is still in its early stages of formation.
Meanwhile, we reliably know that the price of Bitcoin is characterized by cyclical volatility, and there are a number of confirmations of this. In early 2013, the value of the first cryptocurrency rose from $15 to $266 and then fell to $50. In 2018, the bitcoin rate rose to $20,000 per bitcoin and then fell to $6,000. Bitcoin exchange rate has changed significantly over the years, but what is behind these changes?
Below, you’ll learn more about what cryptocurrency volatility is and the factors that trigger its growth.
Six main factors behind cryptocurrency volatility
1. News – Bitcoin is still a novelty for many, so what is written about it in the news can have a significant impact on the price. These include geopolitical events, government regulatory statements, and even rumors spread through social media. Incidents that cause panic and instill fear in the public about destabilization and even destruction of Bitcoin can quickly reduce its value.
2. Perceived value compared to fiat currency – Bitcoin has properties inherent in gold; for example, they need to be “mined” and both are available in limited quantities.
Bitcoin emission is limited to a fixed amount (21 million BTC) at the program level. Fiat currencies, on the other hand, are controlled by governments that need to consider various factors, including employment rates, inflation, and so on. Thus, the fall or rise in the value of fiat currencies also affects people’s investment decisions.
3. Forks happen when disagreements arise between developers that lead to the emergence and coexistence of incompatible versions of software. This causes confusion and confusion. Consequently, volatility increases as traders try to predict what will happen after the fork and trade accordingly.
4. Whales are a few people or companies that own a significant share of bitcoins. Their orders on spot exchanges affect the entire market.
5 . Liquidity is the ability to quickly sell or exchange an asset for another coin or cash at a fair price. For high liquidity, there must be many buyers and sellers on the market who are ready to make deals. If a major deal is offered, but there are few buyers and sellers, it can trigger a significant price change.
6. Market size – Bitcoin price fluctuates based on supply and demand, just like the value of any market asset. People buy and sell at prices that are acceptable to them. If for one reason or another, buying pressure increases and people buy more bitcoins, prices will rise.
If there is more pressure from sellers and people sell their coins for fiat currencies, prices, on the contrary, will fall. Compared to the rest of the financial world, the Bitcoin market is still tiny, which means that all other factors affecting volatility are amplifying here.
Average value of Bitcoin volatility over 30 days. Data: buybitcoinworldwide.com
Market volatility is an important detail that allows traders to analyze the prospects for buying digital assets in a given period.
What will happen to Bitcoin volatility in the future?
Since Bitcoin is still in its early stages of development as an asset, it is difficult to say with certainty about how it will ultimately be used. Today, this uncertainty is affecting market sentiment, leading to increased volatility. However, it will begin to fade as soon as the role of Bitcoin is firmly entrenched in the public consciousness.
As the rules improve and institutional investors come in, people will begin to trust Bitcoin and recognize its value as an alternative asset class, so volatility will eventually decrease.
How to make money on Bitcoin volatility
You can benefit from fluctuations in the price of a cryptocurrency. An easy way to make money this way is to follow the news about the digital asset market and open positions on the exchange on time. In order to predict the impact of certain events on the position of the cryptocurrency, you do not need to be an expert. For example, if there is news about the legalization of Bitcoin in a large country, it can be assumed that the coin rate will grow. The logic is as follows:
- Legalization can be equated with government support for a financial instrument.
- Against the background of the approval of the country’s regulators of the cryptocurrency, many investors who previously did not dare to buy bitcoin due to fear of being outlawed will be able to legally buy coins.
- The growth in demand for bitcoin will support the positive movement of the cryptocurrency rate.
In this case, the higher the volatility, the more you can earn.
Sometimes the decision to capitalize on fluctuations in the price of a digital asset can come spontaneously. Unfortunately, to start working on most crypto-exchanges, you need to go through the registration procedure with identity verification. The process often takes a long period of time. In addition, the transfer of personal data to a third party is always a risk. No one can guarantee the protection of information from leaks.
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