Bitcoin vs Risk: Understanding Volatility by Stefano Gianti Swissquote

As the most popular cryptocurrency, Bitcoin demand increases because supply is becoming more limited. Long-term, wealthier investors hold their Bitcoins, preventing those with fewer assets from gaining exposure. According to the National Bureau of Economic Research, one-third of all Bitcoins were held by http://www.homesyst.ru/comments/page-149 the top 10,000 investors at the end of 2020. Another key factor behind volatility in bitcoin prices and the rest of the crypto market is the profile of investors who are immersed in the industry. While bitcoin prices can rocket on a whim, they can also fall heavily for seemingly little or no reason.

Why Is Bitcoin Volatile

Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities). By shrinking the amount of Bitcoin in circulation beyond the limits built into the system, Bitcoin’s liquidity could dry up. This means that movements to buy or sell could quickly influence its price, driving it up or down violently. Meet our panel of SoFi Members who provide invaluable feedback across all our products and services. As cryptocurrency is inherently volatile, there’s not much you can do to control it. When an issue is out of your hands, one of the best tactics is to sit tight.

Are There Ways To Reduce Bitcoin Volatility?

Volatility may indicate the potential for above-average returns on a trade, but it is also one of the main indicators of risk. This can make a Bitcoin investment less predictable in the short-term compared to other investments. The 2022 bear market has caused many people in the cryptocurrency industry to question the viability of cryptocurrencies as a whole.

The overall crypto market was also probably due for a correction after weeks of tweet-inspired record climbs, courtesy of Elon Musk. Dollar-cost averaging is an investment strategy where an investor purchases an asset over several trades which are spaced across time. The purchases are generally evenly spaced and deploy a constant amount of dollars. With a market cap of about $825 billion, bitcoin accounts for less than 0.1% of all of the world’s aggregate wealth (somewhere north of $1 quadrillion). Other competing stores of value include gold, bonds, real estate, and high art.

Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models. He pointed out that there’s a need for legislation to specify which regulator should oversee crypto exchanges. Gensler mentioned that the SEC “taken and will continue to take our authorities as far as they go.” The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com.

Will Bitcoin Volatility Ever Reduce?

As long as Bitcoin retains a position as the largest cryptocurrency, its halving will have a direct impact on the overall direction of the market. There are a number of factors unique to cryptocurrency which either create or amplify this volatility. Despite the occasional technical glitches or security breaches, the overall stability and progress of the cryptocurrency industry are constantly improving, strengthening investor confidence in the long-term.

Why Is Bitcoin Volatile

As of the date this article was written, the author does not own cryptocurrency. The tax stance taken by the IRS means taxes must be paid when you use Bitcoin. As a result, taxes factor into Bitcoin’s market price—but it doesn’t necessarily contribute to its volatility unless the tax regulations change often and cause investor concerns.

Rising demand

Unlike assets that have stood the test of time and are now subject to fewer fluctuations, new currencies are greatly impacted by a number of external factors we’ll explain below. The market moving potential of individual holders is likely to decline as the asset grows. As Bitcoin becomes more expensive, it will require a larger amount of fiat currency to put upward pressure on the market price. Large individual holders will still have the ability to increase sell pressure drastically, putting downward pressure on the price. Either they will hold their bitcoin and restrict sell pressure, or they will sell their bitcoin, contributing to a more evenly distributed asset.

  • Bitcoin is expected to become less volatile as clarity around the currency develops and Bitcoin markets become more efficient.
  • However, with a little bit more of an understanding about what causes such wild swings, you should be better prepared to keep your cool and navigate intelligently through the chaotic crypto landscape.
  • Over time, the size of these rewards decreases, so each new completed block earns miners less than it used to.
  • This changed with President Nixon abandoning all linkages of the U.S. dollar to gold in 1971, removing the peg or fixed exchange rate of gold to U.S. dollars and adopting a free-floating exchange rate.

She has a passion for decentralization and the potential of Web 3.0 technologies to empower individuals and create a more equitable and inclusive world. Kate’s writing focuses on explaining complex concepts in a simple and accessible way, and she has been published on a number of popular cryptocurrency and blockchain websites. In her spare time, Kate enjoys reading, hiking, and watching Friends over and over. Consequently, as mining costs increase, it follows an increased value of the cryptocurrency. Miners won’t continue to mine if the value of the currency they’re mining isn’t high enough to cover their costs. Bitcoin mining is a prime example, with the price adjusting to miners.

However, there’s an equal chance that the same cryptocurrency can plummet in value due to the factors mentioned above. A cryptocurrency’s underlying technology plays a significant role in determining its value. Blockchain technology is universally prevalent and necessary for any cryptocurrency to function and usually operates on a consensus mechanism like a proof-of-work or a proof-of-stake protocol. This makes them censorship-resistant, free from intermediaries, and almost impossible to terminate. The empirical analysis is based on a dynamic Bayesian model averaging approach for twenty-two potential determinants.

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