Why Is Bitcoin Volatile?
Categories: Bitcoin
Bitcoin, made publicly available in 2009, began its rise to popularity around 2010 when the price for one token rose from fractions of a dollar to $0.09. Since then, its price has increased by tens of thousands of dollars—sometimes rising or falling thousands of dollars within days.
There are several reasons why Bitcoin has such a volatile price history. Understanding the factors that influence its market price can help you decide whether to invest in it, trade it, or continue watching its developments.
Bitcoin Supply and Demand
Supply and demand influence the prices of most commodities more than any other factor. Bitcoin's market value is primarily affected by how many coins are in circulation and how much people are willing to pay. By design, the cryptocurrency is limited to 21 million coins—the closer the circulating supply gets to this limit, the higher prices are likely to climb.
It is difficult to predict what will happen to prices when the limit is reached; there will no longer be any profit from mining Bitcoin. As big financial players compete for ownership in an environment of dwindling supply, Bitcoin's price will likely fluctuate in response to any actions they take.
Bitcoin Investor Actions
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 the top 10,000 investors at the end of 2020.2 Brokers and other financial institutions are working desperately to get approval from the Securities and Exchange Commission for Bitcoin-backed securities—the number held by institutions and large investors will continue to rise as more securities are designed.
Bitcoin volatility is also driven, to an extent, by these investors. It is unclear how Bitcoin whales—investors with BTC holdings in the tens of millions or more—would liquidate their significant positions into fiat currency without affecting Bitcoin's market price. If the whales were to begin selling their Bitcoin holdings suddenly, prices would plummet as other investors panicked as well.