Bitcoins volatility definition
Volatility is the price that bitcoin investors pay for its limited supply and its lack of a central bank to control that supply. Cryptocurrency is an incredibly volatile investment. In one day, Bitcoin's value dropped 30%. But, why? Bitcoin's price fluctuates because it is influenced by supply and demand, investor and user sentiments, government regulations, and media hype. All of these. CRYPTO SIGNALS BOT
Meanwhile, during the same timeframe, Bitcoin volatility was significantly higher, resulting in a correction of a much higher magnitude and percentage. Other cryptocurrencies are even more volatile than Bitcoin. With Bitcoin volatile in this manner, it also makes it a great digital asset for traders and not just holders, as they can profit from the price action in between each major swing. Here are some of the most critical factors influencing Bitcoin price fluctuations.
Speculative Asset More than any other reason and all other reasons combined, because Bitcoin is so subject to speculation, it is especially susceptible to changes in market sentiment. This causes trends to be especially powerful, and tend to overextend.
The reason for this is because no one knows what each Bitcoin should be worth, nor is it in heavily enough use to understand what applications it can ultimately have for everyday life. Bitcoin volatile as it is currently makes it unsuitable to use as a currency for daily transactions, which pundits often criticize the coin over.
Instead, Bitcoin is being used as a speculative store of value, with an ultimate goal of some day being used as a currency. Bitcoin will either succeed and eventually replace the dollar as the global reserve currency, or it could become a complete failure, for example, if a major vulnerability is discovered.
Therefore, when sentiment shifts, it tends to shift towards extremes, and price action follows. Market Size The overall market size compared to other assets is also a reason for the massive volatility in Bitcoin.
The lower amount of liquidity makes price fluctuations that much larger on the price chart. There are also only 21 million BTC, which has made the asset heavily sought after for a hedge against inflation. But at the same time, the small amount of coins means that any capital that comes in is distributed across a tiny amount of shares per coin, making the market cap and price per coin rise and fall rapidly.
Regulation At some point, governments could step in to more firmly regulate Bitcoin. The current lack of regulation does contribute to Bitcoin volatility, in a sense that there is always a layer of fear that something could happen with laws pertaining to the ownership of Bitcoin. Global, Always On Market Another factor that makes Bitcoin volatile, is the fact that the market is always on, and reaches globally. The United States and Europe make up the largest share of investors in cryptocurrencies, but because the market stays on after hours in these countries, trading volume diminishes, order books are cleared, and it offers a prime opportunity for whales to strategically manipulate the price action.
What Is the Bitcoin Volatility Index? According to the index, the higher the index goes, the more volatile Bitcoin is and the riskier it is as an investment due to how unpredictable price action can get at that stage. The Most Remarkable Bitcoin Price Fluctuations In Cryptocurrency History If you want to get a glimpse at how profitable Bitcoin has been historically due to its volatility, then review the Bitcoin price chart dating back to past bull markets and bear cycles.
Bitcoin price action goes parabolic with each bear market cycle. The below example was introduced earlier in this guide. The Best Strategies To Benefit From Bitcoin Volatility As you can see in the historical examples above, Bitcoin price volatility can be extremely profitable, or painful, depending on if you are a holder or a trader. The cryptocurrency now trades at prices more than ten times that, so holders prevailed in the end, but it took four years and many downtrends before price action turned upward again.
Buy Low, Sell High Had those holders sold their Bitcoins at the peak and re-bought lower, they would have had multiple opportunities to increase their cash holdings and Bitcoin holdings concurrently. Bear markets are ideal for this. Day Trading Day trading involves using a small portion of a Bitcoin stack to take intraday positions on smaller price swings. This in-and-out trading action can be profitable, and lets holders continue to have a larger stack of spot BTC. Swing Trading Swing trading takes a larger amount of BTC on trade to make a difference, and takes tons of patience.
Swing trades aim to time tops and bottoms with some degree of accuracy, and hold the positions for a period of weeks to potentially months before closing. Trades of this manner tend to be more profitable, but more challenging for timing. This way, users will hold spot BTC, while trading Bitcoin to maximize profit opportunity with day trading or swing trading strategies.
Those that consider holding through it, will have to suffer and stomach all of the ups and downs in between each major bull and bear cycle. Those that hold through it are ultimately rewarded, but in the end could always have made a lot more money off Bitcoin by trading instead. These features enable cheaper to operate and more dynamic markets, and in some cases financial models that would not exist otherwise, thus why everyone from central banks to Wall Street is exploring blockchain technology.
The added efficiency comes with tradeoffs, however. On the one hand, capital formation improves, and entrepreneurs can tap a larger pool of potential investors. But an unavoidable consequence of bringing such enhanced efficiency to the shares of any young project is extreme volatility. Most startups fail, and investing in one is making a bet in a race against oblivion. So do outside developments, like getting a liquor license.
The distribution of eventual outcomes for any business is widest at birth, so rational investors have no choice but to constantly overreact. Landing a liquor license might make them quadruple, while a bad review may make them tank. Given the uncertainty, external developments would also have an amplified impact. A new restaurant is more vulnerable to things like dining fads or bad weather than an established one.
Everything Is Bigger on Blockchain Crypto investors grapple with a stronger version of this phenomenon because everything is borderless, and the total addressable market is huge. Unlike a new community bank, a blockchain-based lending protocol could theoretically serve hundreds of millions of people all over the world. Success could mean significant value accrual to its token, but the project could also fail.
Early investors have no choice but to flail back and forth between hope and despair. Crypto investors have no such option. Most digital assets are a hybrid and transition from one category to another throughout their lifecycle. Ether, for instance, started as a security, as its coins were sold up front to fund development. But once the blockchain launched, it transitioned to being a cross between a currency and a commodity.
Some people used it as a store of value or medium of exchange, while others used it to pay for transaction validation and code execution. Today, it has evolved even further to a yield-bearing instrument, a collateral asset for borrowing, a reference currency for NFTs, and the means by which validators participate in consensus.
All of these attributes make it difficult to assess the value of even the most mature crypto project, never mind the thousands that have launched recently. A skeptic could argue that these challenges are the very reason why nascent projects should not have tradable equity. But such restrictions have their own drawbacks. Lack of access to startup investing has contributed to the growing wealth gap. Other investments like real estate or collectible art had too high an entry price for most people.
Bitcoin was the lone exception, the only high-performing asset that was universally accessible and fractionally ownable from day one. Price swings communicate important information to founders and investors, particularly during the crucial adolescent stage of any startup. And restricting price discovery to periodic funding rounds negotiated with a handful of investors can be dangerous.
Despite multiple red flags for both companies, there was little price information until the bitter end. The Good News About Bad News Universal access, immediate price discovery, and greater transparency also contribute to both the reality and the perception of scams and shady behavior in crypto. Like any technology that removes friction, the ease with which new projects can be launched has been a boon to con artists and fly-by-night operators, in the same way that the accessibility and efficiency of email led to a spike in supposed Nigerian princes looking for a place to park their money.
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