The Reasons Why Bitcoin Has A Volatile Value – Part 1

Explaining Bitcoin Volatility Index

It is noted that price fluctuations in the bitcoin spot rate on cryptocurrency exchanges which are driven by many factors as volatility are measured in traditional markets by the Volatility Index also known as the CBOE Volatility Index, as more recently a volatility index for bitcoin has also become available which is known as the Bitcoin volatility index aiming to thereby track the volatility of the world’s leading digital currency as also by market cap over various periods.

It was then that the Bitcoin’s value has been historically quite volatile. Whereas in three months from October of 2017 to January of 2018, for instance, the volatility of the price of bitcoin reached to nearly 8% as it is seen to be more than twice during the volatility of the bitcoin in the 30 day period that was ending January 15, 2020. but then why is bitcoin so volatile, the answer comes here as just a few of the many factors behind bitcoin’s volatility. 

How Bad News Hurts Adoption Rate?

It was hence observed that the news events that scare these bitcoin users are seen to include geopolitical events and the statements thereby governments that bitcoin is likely to be regulated, whereas bitcoin’s early adopters included several bad actors producing headline news stories producing fear in investors.

Thereafter the headline-making bitcoin news over the decade or so of the cryptocurrency’s existence includes the bankruptcy of Mt. Gox in early 2014 as also more recently that of the South Korean exchange YapianYoubit and other news stories have shocked investors including the high profile use of the bitcoin thereafter in drug transactions through silk road that eventually ended with the FBI shutdown of the marketplace in October 2013.

Herby all these incidents as well as the public panic that ensued drove the value of bitcoins versus fiat currencies down rapidly. The truth is that it is however that bitcoin-friendly investors have viewed those events as evidence which then the market was maturing driving the value of bitcoins versus the dollar markedly back up in the short period immediately following the news events. 

The Bitcoin's Perceived Value Sways

Here is one reason why Bitcoin may fluctuate against fiat currencies is the perceived store of value versus the fiat currency as the bitcoin has properties that make it similar to gold. Therefore, it is governed by the design decision by the developers of the core technology to limit its production to an affixed quantity of 21 million BTC.

Subsequently, it is found that since that differs markedly from the fiat currency that is then dynamically managed by governments who want to maintain low inflation, high employment, and satisfactory growth through the investment thereby in capital resources, as these economies built with fiat currencies are showing signs of strength or weakness, as investors may allocate more or less of their assets into bitcoin. 

Why The Uncertainty Of Future Bitcoin's Value

It was found that bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer. It is hereby a store of value as the function by which an asset can be useful in the future with some predictability as also a store of value can be saved and exchanged for some good or service in the future. 

This is where a method of value transfer is any object or concept used to transmit property in the form of assets from one party to another and Bitcoin’s volatility at the present makes it a somewhat unclear store of value whereas it promises nearly frictionless value transfer and as result, we see that bitcoin’s value swings based on news events much as we observe with fiat currencies. 

The Large Currency Holder Risks

Henceforth there comes bitcoin volatility which is also to an extent driven by those holders of large proportions of the total outstanding float of the currency as for bitcoin investors with current holdings above around d $ 10 M as it is not clear how they would liquidate a position that large into a fiat position without severely moving the market. Therefore, it is indeed that it may not be clear how they would liquidate a position of that size in a short period at all, as most cryptocurrency exchanges impose 24-hour withdrawal limits far below that threshold. Hence bitcoin has not reached the mass market adoption rates that would be necessary to provide option value to large holders of the currency

The Concluding Thoughts

Why is the bitcoin volatility important to determine its market capitalization? The above-mentioned reasons don’t end here but continue to the next post. There we indulge in more reasons explaining the volatility index as put forward by the bitcoin in its market.