The Reasons Why Bitcoin Has A Volatile Value – Part 2

Continuing from the previous post here we bring you more on the volatility of Bitcoin. Here we take a look into the reasons contributing to the volatility of Bitcoin value. Read on and get the details right. 

Security Breaches Cause Volatility

As the bitcoin community exposes security vulnerabilities it has become volatile to produce massive open-source responses in the form of security fixes. It was in this context that the approach to security comes to be a paradoxically one that produces great outcomes along with many valuable open source software initiatives to its credit including Linux. Hence Bitcoin developers must reveal security concerns to the public to produce robust solutions.

Hereby it was a hack that drove the YapianYoubit to bankruptcy whereas many other cryptocurrencies have also made it to the headlines for being hacked or having stashes of cryptocurrencies stolen. The OpenSSL vulnerabilities attacked by the Heartbleed bug comes as an example and reported by Google security’s Neel Mehta driving Bitcoin prices down by 10% in a month.

As it is built upon the same fundamental premise, bitcoin and open source software development have a copy of the source code available to users to examine. It was therefore that this concept makes it the responsibility of the community thereby to voice concerns about the software design as it is just its responsibility of the community to come to a consensus about modifications to that underlying source code as well. This comes as a result of the open conversation and debate regarding the Bitcoin network, security breaches tending to be highly publicized. 

High-Profile Losses Raise Fear

While it is worth noting that the aforementioned thefts continue to be the ensuing news about the losses that have a double effect on volatility. Therefore, they reduce the overall float of bitcoin producing a potential lift on the value of the remaining bitcoin due to increased scarcity. It is however overriding this lift which was the negative effect of the news cycle that followed. 

Thereafter other bitcoin gateways are those that are looking to the massive failure at Mt. Gox which is a positive for the long-term prospects of bitcoin further complicating the already complex story behind the volatility of the currency. It was therefore observed that as early-adopting firms were eliminated from the market due to poor management and dysfunctional processes later entrants learn from their errors and build stronger processes into their operations strengthening the infrastructure of the cryptocurrency overall. 

High-Inflation Nations And Bitcoins

This is where the bitcoin’s use case as a currency for developing countries which are currently experiencing high inflation that is valuable when considering the volatility of bitcoin in these economies versus the volatility of bitcoin in USD. This shows that Bitcoin is much more volatile versus USD than the high inflation Argentine peso versus the USD.

Further on the near-frictionless transfer of bitcoins across borders still make it a potentially highly attractive borrowing instrument for the Argentinians as the high inflation rate for a peso-dominated loan then justifies the taking on of some intermediate currency volatility risk that is in a bitcoin denominated loan funded outside Argentina.

Therefore the funders outside Argentina can similarly earn a higher return under this scheme that they can by using other debt instruments whereas denominated in their home currency, it is potentially offsetting some of the risks of exposure to the high inflation Argentine market. 

Finally Concluding By Discussing How Tax Treatment Lifts Volatility

Bitcoin is considered an asset for tax purposes according to the Internal Revenue Service, as it has had a mixed impact on bitcoin’s volatility whereas, on the upside, any statement recognizing the currency has a positive effect on the market valuation of the currency.

Thereafter the decision by the IRS conversely to call it property had at least two negative effects as the first was the added complexity for users who want to use it as a form of payment. it was then found that under the new tax law, users would have to record the market value of the currency at the time of every transaction no matter how small. Hence this need for record-keeping can be understandably slow adoption as it seems to be too much trouble for what it is worth for many users. 

Hereafter secondly the decision to call the currency a form of property for tax purposes has come to be a signal to some market participants that the IRS is preparing to enforce stronger regulations later. Therefore, very strong regulation of the currency could cause the adoption rate thereby of the currency to slow to the point as to where it is not able to achieve the mass adoption that comes to be critical for its overall utility in the society. Therefore, the recent moves by the IRS are not clear as to their signaling motives, and therefore have mixed signals to the market for bitcoin. 

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