Why Does Bitcoin Price Vary So Wildly?
A magnificent idea, some brilliant coding, and meticulous work were all that Satoshi Nakamoto, the pseudonymous founder of Bitcoin, needed to mark the start of the biggest disruptive revolution after the internet.
Nakamoto published the Bitcoin whitepaper in 2008, where Bitcoin was defined as a P2P (peer-to-peer) network of electronic cash that would allow online payments and would not depend on any intermediaries or a central authority like the banks or the government. The basic idea was to create a hassle-free payment method directly from one user to another. It caught the fancy of investors when its value jumped from a fraction of a dollar to one US dollar in 2011.
Over the years, Bitcoin has witnessed many rallies and crashes when its value has gone up by tens of thousands of dollars and, at times, fluctuated by thousands of dollars within a single day.
There are numerous reasons why Bitcoin’s value has been so turbulent. Following are a few factors that will help you get a broad picture of Bitcoin’s volatile price history.
#1 Limited Supply But Varying Demand
The demand and supply forces are major factors that influence the value of Bitcoin and many other financial assets. Bitcoin is limited in supply. BItcoin’s supply is hard-capped at 21 million. As of now, there are only 2 million bitcoins left to mine, which means almost 80% of the total bitcoins are already in circulation.
So, it is self-conclusive that the price will increase as the supply nears exhaustion. But the last bitcoin won’t be mined until 2040. How Bitcoin prices will be impacted when there will be no bitcoins left to be mined is a matter to be discussed and watched over. In all probabilities, here are a few things that are most likely to happen:
- The price of Bitcoin would incline towards becoming more stable. Once all the 21 million bitcoins are mined, they may automatically transform into a part of the ‘asset’ class. Experts already cite Bitcoin as the ‘digital gold.’
- As miners would no longer be able to mine bitcoins and get rewards, the primary revenue stream will be transaction fees.
*Readers, please note that these are just wild predictions.
#2 News and The Crypto Markets
Global developments and related news are other major factors responsible for the volatile prices of Bitcoin. The reason is pretty simple, no rocket science. Whenever there is something negative development on the global front, for instance, the pandemic, stock market crash, US dollar inflation, or even the Russia-Ukraine war, the price of Bitcoin takes a plunge as investors try to get out before the price goes down any further.
Any development related to the crypto markets, regulations, and crypto adoption also impact Bitcoin price. For example, the news of El Salvador accepting Bitcoin as legal tender in November 2021 did its bit to push Bitcoin prices towards a new ATH of $69,000, while the Chinese crackdown on cryptocurrencies caused Bitcoin prices to plunge.
#3 Imperfections In Encryption and Security
Let’s say you have invested some money in a few cryptocurrencies, and one fine day you hear of cyber theft associated with a random crypto exchange. What would be your first reaction? You would probably check if the cryptocurrencies you had invested in were doing alright with no harm- basically checking for any threats.
What happens with other investors is no different. They try to pull themselves out of this and book their profits or losses before losing any more value on their investments. Many people consider such cyber attacks a red flag and soon exit the market. This, in turn, affects Bitcoin’s price.
#4 Crypto Regulations Enforced by Central Governments
Though we don’t get to hear about this factor impacting Bitcoin’s prices much often, it still affects the price of cryptos to some extent. The actual magnitude of the impact of regulatory announcements or the government’s stance regarding Bitcoin’s legality is debatable.
The US SEC bipartisan crypto bill proceedings and the IRS ruling on Bitcoin’s status as a convertible asset taxable under IRS laws directly impacted the Bitcoin price volatility. On the other hand, when the US SEC allowed the listing of the first Bitcoin ETF, Bitcoin prices skyrocketed in the ensuing days.
#5 Investors’ Holdings
Since any government or financial institution does not control Bitcoin, its price solely depends on whether there are more buyers or sellers on that particular day. Although this does not account for any major changes in the price, it still is a factor on which the price depends. News pieces about Bitcoin whales moving their investments or hodling in Bitcoin had, in the past, impacted the prices.
All the above factors impact Bitcoin’s prices and cause volatility. But Bitcoin is still in its infancy and is still undergoing price discovery. Its prices will continue fluctuating and witness sharp ups and downs as users, governments, and investors continue figuring the way out as Bitcoin exits its puberty to become more stable.