Any investor who cares about improving his or her investment portfolio knows about the existence of cryptocurrency and is looking at using cryptocurrency exchanges and other crypto apps.
Potential investors are trying to take a closer look at historical fluctuations in the price of Bitcoin in order to assess the degree of risk of investing in it. Since Bitcoin, its underlying technology and everything related to it are difficult to understand, many investors try to avoid buying Bitcoin.
However, those who are interested in it have even more questions. For example, they are very interested in the question of why the price of Bitcoin fluctuates so much, and how to use it to make a profit.
What Determines the Price of Bitcoin?
Each fluctuation in the price of Bitcoin is a whole story, which is reflected in its two sides: supply and demand.
In Bitcoin, the supply aspect is quite clear: the supply of Bitcoin coins is limited to 21 million, and this is a kind of measure to minimize price fluctuations. The number of coins on the market and the rate at which they are issued is also known, while it is more difficult to determine how many coins are lost forever due to the loss of private keys for wallets developed even by the best company like MLSDev.
But understanding demand is a little more complicated. It is the demand that causes the price of Bitcoin to fluctuate so much. Here are some of the factors that affect demand and therefore the price of Bitcoin:
- acceptance (recognition, popularity) of Bitcoin;
- expanding ways to use Bitcoin;
- Bitcoin market speculation;
- a relatively small market where small players can tip the scales;
- no regulatory restrictions.
Perception of Bitcoin’s Purpose
Understanding the demand for Bitcoin is almost impossible. This is due to the search by investors for a place for Bitcoin in the world (BTC identity crisis).
Investors have many questions: What is Bitcoin? Is it a currency or digital gold? Or maybe both?
The short answer to these questions:
Bitcoin was created as a currency, while its deflationary nature and key features (decentralization, immutability, p2p transaction capability) make it a desirable store of value.
Thus, fluctuations in the price of Bitcoin can not always be placed next to the fluctuations of conventional currencies, since Bitcoin is not related to interest rates as a currency in banks; its inflation/deflation is illusory; and its purchasing power depends on the demand on it, while the coin does not belong to any national economy.
Bitcoin Acceptance Is a Demand Function
However, as an alternative to fiat currencies, Bitcoin can be used in any financial transactions around the world.
Thus, acceptance is a key metric in explaining the demand for Bitcoin, and hence the fluctuation in Bitcoin price. The rise in acceptance in this case also means an increase in the number of people using Bitcoin for their day to day transactions.
Bitcoin As a Storage of Value
However, Bitcoin acceptance is not an exhaustive “measurement tool” for demand. There are many people who buy Bitcoin as a store of value and do not use it as a currency. These people are adherents of Bitcoin, but they use it to hedge their funds and keep their funds on best crypto wallets 2020.
For example, more and more Venezuelans and Argentines are turning to Bitcoin, while the currencies of these countries are experiencing hyperinflation. These coin keepers do not necessarily spend them every chance they get.
Bitcoin Speculation Is a Major Factor In Volatility
It would seem easy to understand strong fluctuations in Bitcoin, given that there are those who spend it and those who store it.
However, there is also a third class of Bitcoin followers – speculators who don’t care about hedging and consumption. The only thing that interests them is the benefits of trading Bitcoin in terms of fiat money.
Volatility Is Now Lower
Even if speculators are primarily responsible for the fluctuations in the price of bitcoin, there has been a tendency for its volatility to decrease recently:
The volatility of the Bitcoin price is still far from the absolute monthly change in the price of gold – 2-7%.
However, it is declining, and this is likely to attract more risk-averse investors to the market.
Hopefully, this trend will continue and we will see a healthier rise in Bitcoin as the main cryptocurrency has more supporters and investors.