Various factors influence the price of Bitcoin, we take a look at factors that cause fluctuation and why there is still groundbreaking potential to be seen in the price of cryptocurrencies.
The price of Bitcoin is directly related to demand and supply. How it works is when too many people start buying Bitcoins, the demand increases. When Bitcoin demand reaches a saturation point – perhaps traders are selling for profit, news of an exchange hack or even resistance to paying the current price of Bitcoin, then the Bitcoin price falls.
This Bitcoin price volatility is measured by the Volatility Index and can reach 10x changes in price versus the U.S. dollar within a fairly short space of time. The double or even triple-digit increase or decline in value of crypto coins or Bitcoin price within a fluctuating 24-hour period can often give crypto-traders dramatic and sudden losses or profits.
Investors interested in Bitcoin should keep in mind that the cryptocurrency market, as it relates to all digital currencies, is relatively small when compared to markets for more traditional assets such as stocks, bonds and fiat currencies and as such remains largely speculative. However this also means there is so much room for growth, we are only in the very beginning stages of Bitcoins life.
Bitcoin price high volatility is due to the low liquidity we have on exchanges today. With the value of Bitcoin determined solely by market demand, when demand diminishes, the price goes down. If the demand for Bitcoins increases, the value climbs back up. However, cash out strategies also has an influence on Bitcoin value. When investors sell their Bitcoins on a large scale in order to redeem the value gain in fiat money (for example, before Christmas or at the end of the financial year) you may see an effect on price.
As a potential alternative currency to the standard fiat currencies, regulation is another area potentially contributing to Bitcoin’s intense volatility. Governments statements that Bitcoin is likely to be regulated can spark widespread volatility.
Major news events 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.
Investor fear can be sparked by a range of statements in the media either by financial losses due to scams and fraudsters or by events such as the bankruptcy of Mt Gox, seen in 2014.
When news is positive, it can spur buyers interest and cause market participants to buy bitcoin, pushing its price higher, for example, when Overstock.com, Expedia.com, Microsoft and Dell announced that they would accept bitcoin the price increased by double-digit percentage points. In the Cryptosphere they say these buying frenzies are caused by FOMO which is short for “Fear oF missing out”
Another major cause of bitcoin’s volatility is shifting speculation.
Bitcoin reflects properties like that of gold and is governed by developers of its core technology to limit production to a fixed amount of 21 million BTC.
Many believe that bitcoin could become a global standard one day, some even believe that this could see 1 bitcoin worth millions of dollars (each), of course, nobody really knows. Those who believe this to be possible often speculate and trade the digital currency in the hope that they can accumulate as much as possible whilst the price is still within reach. These types of speculators are often the ones who cause buying frenzies that drive the price up astronomically in a relatively short period - these normally end in some sort of correction. It is important to note that even though there are price surges and price drops Bitcoin is still up in value several thousand percentage points since its first few years of existence.
With interest in cryptocurrencies by financial institutions on the rise, ever since Bitcoin futures came online, other service providers have been looking into this option as well. Various banks are considering launching a cryptocurrency trading desk and there are multiple applications for ETFs being considered by the US SEC, should one get approved this would make it possible for the average American to buy Bitcoin as easily as buying a stock in a company.
This trend has continued with traders leaving high positions in Wall Street in favour of cryptocurrency ventures which ultimately holds no real guarantees but potentially high rewards.
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