People consider Bitcoin a volatile crypto asset because its price fluctuates significantly within a short period. Essentially, Bitcoin volatility implies that its price or value can change dramatically in a short duration. While Bitcoin’s volatility creates the opportunity to trade it for profits, you could lose a significant amount of the money you invest in it. Several reasons make Bitcoin a volatile asset. Here are the primary factors that contribute to this virtual currency’s volatility. If you are interested in bitcoin trading check different websites such as Bitcoin Era system .
Bitcoin is Still New
People have enjoyed using Bitcoin for a relatively short period compared to gold and fiat currencies which users consider stable commodities. So, this digital asset is still in its finding phase. And this means the price of this digital currency will continue to fluctuate as investors, users, and the government work through the early growing problems and interests.
Additionally, the world is still figuring out how Bitcoin will fit into the global economy, and different players regularly redefine ideas about this crypto asset. Therefore, Bitcoin’s price will continue to fluctuate until this cryptocurrency finds its position in the economy. Today, people use Bitcoin as an exchange medium, investment tool, and tradable commodity.
Demand and Supply
Demand and supply affect this electronic currency’s value just like other products people need. Bitcoin’s supply plays a vital role in its rapid price movement. In this case, the digital currency gets public attention, but its market capitalization is lower than older assets like gold.
Also, large holders or whales can influence Bitcoin’s value if they hold or sell their tokens. Thus, a few Bitcoin holders can affect Bitcoin’s value and manipulate its volatility. For instance, if a few whales decide to sell, then the supply of this cryptocurrency increases significantly in a short period.
Bitcoin’s Protocol
Bitcoin operates on the cryptographic protocol regulating how users generate new coins and the total number of coins that the world can ever have. Unless miners reach a consensus to change this protocol, the world will never have more than 21 million coins. Thus, Bitcoin is a scarce commodity that everybody wants to own before miners generate all the coins. Also, the halving event reduces the number of new coins that go into circulation. This protocol causes scarcity that affects the value of new and existing coins.
Competition from Other Cryptocurrencies
Programmers and developers produce new cryptocurrencies now and then. The world has thousands of cryptocurrencies that want to compete with Bitcoin. However, none of these cryptocurrencies has beaten Bitcoin in adoption, usage, and market capitalization.
If a new cryptocurrency attracts users, traders, or investors, it takes value from the existing ones. As a result, Bitcoin’s price could go down while the new digital currency increases. Therefore, the creation of new cryptos affects the price of Bitcoin, making it more volatile.
Production Cost
The mining process results in the introduction of new tokens into the market. This process involves using a computer to validate transactions and adding them to Bitcoin’s blockchain.
The miner that solves the cryptographic puzzle to confirm a transaction receives the reward in new digital coins.
But Bitcoin mining is a power-intensive activity because it requires powerful computers. Also, mining difficulty influences the amount of time, and electrical power miners invest in the process. In some cases, miners set up rigs with expensive computers to enhance their mining speed. Eventually, mining costs affect the price of the new coins that miners get as a reward.
These are the primary factors affecting Bitcoin’s volatility. Therefore, anybody or organization that wants to invest or trade this crypto asset should understand them to make informed decisions.
