Bitcoin volatility scares off a lot of investors. But as the current crypto crash shows BTC is losing less than altcoins and is recovering faster. It’s also more safe and stable than stablecoins. So now if we take care of that Bitcoin volatility we might finally get the perfect cryptocurrency.
Last and the biggest crypto market crash proved that Bitcoin is still the most stable digital asset.
For more than a decade on the market, BTC went through a dozen of such crashes and so-called ‘crypto winters’.
Despite that, Bitcoin still falls less than all the other tokens during bear markets.
You could do tech analysis, listen to the popular crypto experts, or even layout tarot cards but the real reasons for Bitcoin volatility are in fact pretty simple.
So here are the TOP-8 key factors that impact BTC price and explain Bitcoin volatility.
Regulation
Being widely adopted in different countries and having lots of appliances inside traditional payment systems, Bitcoin is still recognized only by a few governments. El Salvador and Ukraine are among them.
But regulation is one of the main reasons for the crypto volatility.
When China banned Bitcoin mining last summer it affected Bitcoin price immediately and substantially.
Later we had some positive news like the US announcing its digital currency launch or the EU rejecting the crypto mining ban.
But spring of 2022 was disastrous with US economy slowly collapsing, Russian invasion to Ukraine making more global waves. In May Terra and Luna crashed epically with investors losing billions of dollars.
Regulators become worried again.
“There’s a belief that mainstream adoption [of Bitcoin] is taking a lot longer than people expected. Right now, what we’re seeing is that the crypto market is in a wait-and-see mode,” – said Edward Moya, senior market analyst at Oanda.
On the other hand, some Bitcoin maximalists cry out against BTC centralization as it undermines basic crypto values. Like anonymity, community power, security, gov opposition, etc.
Bitcoin volatility is mainly a result of the market sentiment
Any financial market depends on investor attention or sentiment.
Investor’s prevailing attitude generally anticipates market trends and price development.
As we know from the traditional stock market, the sentiment is bullish when investors expect upward price movement. On the contrary, the market sentiment is bearish when most investors expect downward price movement.
The same pattern works for the crypto market. You can easily define current market sentiment with Bitcoin Fear&Greed Index that updates every day.
For instance, at the time of writing the Index shows an extreme fear zone (10 points). It means that investors are too worried and the bear market is coming.
“The crypto market behavior is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in the irrational reaction to seeing red numbers,” – explains the Fear&Greed Index website.
Limited supply is there to resist Bitcoin volatility
The Bitcoin blockchain itself has its own important instrument to control inflation.
As Satoshi Nakamoto, whoever he was, intended, the total amount of 21 million Bitcoins can be mined for the market circulating. Moreover, the coins are minted at a fixed rate for ensuring a steady flow of liquidity.
For now, there are already 19 040 406 mined BTC. It’s extremely hard to mine BTC right now and the block reward today is only 6.25 BTC. At the time of the platform launch, it was 50 BTC.
“Bitcoin’s fixed supply has led some fans to consider it akin to ‘digital gold’. In reference to the yellow metal, another beloved inflation-resistant asset. So-called stores of value assets stand the test of time because they are uncorrelated with other assets and are resistant to entities that interfere with the market,” – CoinDesk writes.
You may also consider also deflationary cryptos with decreasing supply over time. This mechanism helps increase the token value over time. Even if the token demand remains the same.
Speculations
Market speculations are probably the major source of Bitcoin volatility.
The overall high crypto volatility attracts speculative traders or short-sellers, who try to make money quickly. And that makes Bitcoin more volatile.
As we know, Bitcoin doesn’t have a physical asset to back up its value. So its demand highly depends on users’ faith in Bitcoin’s ability to keep or gain in value.
Speculative traders can use this for lowering the price by persuading others to sell, for example. Oppositely, they can shoot prices and make over-inflated price bubbles.
Some say, that after the last crypto market crash speculative investing won’t be popular anymore. Instead, consumers will seek crypto functionality and its long-term development.
But history shows that speculators will never die.
Media hype is the driving force of Bitcoin volatility
You’ve probably heard about Elon Musk Twitter influence. He can post his dog’s photo and cause the Dogecoin price to skyrocket.
Bitcoin media coverage is tightly connected with speculations as social platforms and newspapers have a lot of influence on the market trends.
You can find dozens of crypto media platforms that give contradictory information on the same topic. And most people prefer to perceive the information they actually believe in.
When Bitcoin skyrocketed in value to $20 000 for the first time – everyone wanted to know what it is, how blockchain works, can they get into it easily, and so on.
Of course, there are many other factors to influence prices. But crypto coverage in media also tops when the market is either high up or down. Media needs sensations, and Bitcoin can give it sometimes.
Investors behavior
Traditional financial market investors have some specific behavioral patterns. They monitor the market, make assumptions and calculate possible profit within different investment models.
Unlike that, Bitcoin investors don’t need a lot of money to get in. No personal broker or trading license needed. Just create your wallet and start trading.
But this factor makes price patterns even more unpredictable and contributes to Bitcoin volatility. Without proper experience and knowledge, novice investors are strongly susceptible to hype, FUD (fear, uncertainty, and doubt), and grievous manipulation.
Unexperienced crypto traders are prone to baseless panic while skilled investors can maintain their composure.
“The more retail investors who enter the market, the scarcer and more inexperienced the market becomes, worsening volatility,” – says FinTech recruiting company Storm2.
It’s widely considered that the crypto market becomes more experienced as more institutional investors adopt Bitcoin and fewer retail traders play such a role.
Crypto whales contribute to Bitcoin price volatility
Along with institutional investors, you can find so-called crypto whales.
The community will treat you as a crypto whale if you have more than 1000 BTC. Some data shows that only a few hundred crypto addresses own a lion’s share of all circulating Bitcoin.
That means whales are extremely powerful and they can push or pull the market just by transferring their assets.
And surely whales affect Bitcoin volatility. For instance, a few addresses with a large number of tokens can lower the asset liquidity while holding it frozen.
Whales can also sell their assets in smaller amounts over a longer period to avoid drawing attention. This process can produce market distortions, shaking the price up or down unexpectedly.
Nobody likes whales. They are wealthy and powerful and they can easily turn to dust the last few hundred bucks you put in crypto.
Transaction fees
And last but not least is the power of fees. Extra money you are charged every time you transfer your assets is a substantial factor to Bitcoin price volatility.
Crypto transaction fees inside traditional proof-of-work blockchains depend on their production cost or resources spent on mining.
You must have heard about high gas (transactions) fees on the Ethereum network because of high energy consumption and its carbon footprint.
But the real reason why Ether gas fees are extortionate is the complexity of all the operations in the network which make transaction cost unpredictable and actually unfair.
Bitcoin network fees instead are set proportionally to the size of the transaction in bytes. Simply put, a big transaction needs a higher fee.
As the cost of mining is permanently increasing we can expect crypto value and transaction fees to go up. That adds to Bitcoin volatility, beyond any doubt.
That’s just how it works right now.
