Bitcoin , the world's largest digital currency by market capitalisation,  has generated great returns for some investors. The cryptocurrency 's sharp gains have produced tales of so-called "Bitcoin Millionaires," individuals who got rich by investing in the digital currency and holding it long enough to generate significant wealth. However, many have emphasized bitcoin's highly volatile nature.
The digital currency has experienced sharp price fluctuations, a situation that undermines its ability to function as a currency. Market analysts have pointed to numerous factors to explain why bitcoin is so volatile, and this article will detail several of those variables. Investors interested in bitcoin should keep in mind that its market, as well as that for all digital currencies, is relatively small when compared to markets for more traditional assets such as stocks, bonds and fiat currencies.
As for why this matters, small markets are more vulnerable to manipulation than large markets. In other words, the total figure represents several different markets. Broken down one by one, these markets—and especially the smaller ones—are vulnerable to fluctuations in supply and demand.
While these changes in supply and demand could be the result of factors like shifting market sentiment or investors reacting to news, they could also be caused by efforts to manipulate the market. All it takes is one major investor—or alternatively, a group of smaller investors working together—to create a sharp gain or loss in the value of a specific digital currency. Several cryptocurrency exchanges have suffered so-called "flash crashes," which take place when the value of a particular asset falls sharply in a short period of time.
Coinbase, one of the largest and most well-known exchanges, experienced one of these sharp declines in June Numerous analysts have asserted that bitcoin suffers from liquidity problems, which could in turn be contributing to bitcoin's sharp volatility.
Cedric Jeanson, founder and CEO of BitSpread, commented on the situation by stating that bitcoin's "high volatility is due to the low liquidity we have on exchanges today. Regulation is another area potentially contributing to bitcoin's intense volatility. The first bitcoins came in to existence in Since then, several governments have made efforts to regulate bitcoin, along with other digital currencies.
For example, the U. Commodity Futures Trading Commission CFTC announced in that bitcoin and other digital currencies were commodities, and therefore the government agency could regulate them. China's government has taken a far more aggressive approach, cracking down on domestic exchanges in September and forcing them to shut down. In January , South Korean government officials also cracked down on digital currency trading, announcing that individuals would no longer be able to make such transactions anonymously.
While many governments have made efforts to develop regulations for bitcoin and other digital currencies, lawmakers and regulators have not yet worked together to create regulation that spans many nations. One major factor that can fuel volatility in bitcoin prices is news events. When news is positive, it can spur investor interest and cause market participants to buy bitcoin, pushing its price higher. A perfect example is when news broke that major exchange Coinbase added , users in a single day after exchange operator CME Group Inc.
Another great example came later that same month when it was revealed that, as of October , the number of Coinbase users exceeded the number of active brokerage accounts at major financial services firm The Charles Schwab Corporation.
Media outlets have also published plenty of negative news surrounding bitcoin. In August , nearly , units of bitcoin went missing from Bitfinex. Gox debacle. Another major cause of bitcoin's volatility is shifting sentiment. Major news events, for example, can have a significant impact on the views of market participants, causing them to become more or less optimistic about bitcoin and its future prospects.
If the sentiment surrounding bitcoin becomes more positive, this can result in sharp increases in demand and notable upswings in price. Further, price gains and optimism can combine to form media hype cycles. Basically, these take place when climbing values provoke greater media coverage, which in turn spur additional purchases and price appreciation.
Changes in sentiment can have the exact opposite effect on price. If an asset bubble bursts, and investors start fleeing an asset like bitcoin, the plunging prices can prompt widespread media coverage, causing even more market participants to either sell the asset or simply avoid purchasing it. Another factor that could potentially fuel bitcoin's price volatility is how unevenly it is distributed. If a single individual amasses a sizable amount of bitcoin, he or she can trigger substantial price fluctuations by selling just a fraction of his or her bitcoin holdings.
Many market observers have emphasized the key role that speculation plays in bitcoin's price fluctuations.
Philip Lowe, governor of the Reserve Bank of Australia, offered his two cents on bitcoin, asserting that it is not a very efficient payment method while warning that the digital currency may be influenced a bit too much by hype. There are many different factors that help fuel volatility in bitcoin. Variables including the digital currency's small market size, low liquidity and immature regulatory environment can all help contribute to bitcoin's sharp price fluctuations. As a result, investors who are interested in the digital currency may benefit significantly from conducting thorough due diligence before getting involved.
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What Causes Volatility In Bitcoin? No Tags. Market Size Investors interested in bitcoin should keep in mind that its market, as well as that for all digital currencies, is relatively small when compared to markets for more traditional assets such as stocks, bonds and fiat currencies. Low Liquidity Numerous analysts have asserted that bitcoin suffers from liquidity problems, which could in turn be contributing to bitcoin's sharp volatility.
Regulation Regulation is another area potentially contributing to bitcoin's intense volatility. News Events One major factor that can fuel volatility in bitcoin prices is news events. Shifting Sentiment Another major cause of bitcoin's volatility is shifting sentiment. Inequality of Wealth Another factor that could potentially fuel bitcoin's price volatility is how unevenly it is distributed.
Key Role of Speculation Many market observers have emphasized the key role that speculation plays in bitcoin's price fluctuations. Summary There are many different factors that help fuel volatility in bitcoin.
Disclosure Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice.
Bitcoin Is a Volatile Asset; How Is Its Price Set?
Four factors driving the price ofBitcoin The price of Bitcoin has slumped after a failure to agree on a new direction. Kelly Trinh does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment. All of this shows how volatile the currency is, prompting the question, what leads to such huge movements? Our ongoing research reveals four factors that affect the price of Bitcoin. These include media hype and uptake by peers, political uncertainty and risk such as the election of Donald Trump or the vote for Brexit , moves by governments and regulators, and the governance of Bitcoin itself. It is likely the last factor that has driven the latest drop in the price, as a proposed Bitcoin split or fork failed to gain support from developers towards the end of last week. The split would have doubled the number of coins in circulation as previous splits have and increased transaction speed. Economists have long had a notion that psychological factors affect investor decisions. This is called animal spirits and refers to investors making decisions based on the behaviour of other market participants and their own intuitions, rather than hard analysis.
Why Does Bitcoin Price Fluctuate!? - It's Up, It's Down!
A Brief History of Money
Bitcoin Value and Price. Part Of. Large Currency Holder Risks. That being said, the near frictionless transfer of Bitcoins across borders makes it a potentially highly attractive borrowing instrument for Argentineans, as the high inflation rate for peso-denominated loans potentially justifies taking on some intermediate currency volatility risk in a Bitcoin-denominated loan funded outside Argentina. Bitcoin volatility is also to an extent driven by holders of large proportions of the total outstanding float of the currency. Will it fall this year? Hackernoon Newsletter curates great stories by real tech professionals Get solid gold sent to your inbox. In this guide, I will teach you the history of Bitcoin, the future of it and how to understand what goes into its price prediction. Basically, these take place when climbing values provoke greater media coverage, which in turn spur additional purchases and price appreciation. Even though they want to create new regulations, we must remember that:. The people that bought the stocks when they were at high prices, lost most of their money. Several longer duration indicators, like the weekly money flow index MFI and the moving average convergence divergence MACDwould add evidence to the trend. As a growing number of people become aware of and interested in Bitcoin --especially when the price tends to increase -- we often get asked:. Kayla Matthews KaylaEMatthews. Why does this digital currency have so many ups and downs? First, it provides bitcoin access to investors who cannot afford to purchase an actual bitcoin, thus increasing demand.