Bitcoin (BTC) is a virtual currency developed by Satoshi Nakamoto in 2009. It is mostly used to pay for online services and buy all sorts of products. You might ask why aren’t more products priced in BTC then?
The problem is that Bitcoin lacks price stability. The price of Bitcoin fluctuates very often which is one of the main reasons why a lot of merchants are still hesitating to add support for Bitcoin payments.
The volatility of fiat currencies in the standard market is determined by something called the volatility index. Similarly, Bitcoin’s volatility is measured with the Bitcoin Volatility Index, whose purpose is to follow the volatility of the leading digital assets by taking into account their market capitalization over regular time intervals.
Now, you might be curious as to why Bitcoin fluctuates to such an extent? In this article, we’ll discuss several factors that determine Bitcoin’s value and the main reasons that cause its price fluctuations.
What Determines Bitcoin’s Value?
Bitcoin, unlike fiat currencies, isn’t supported by the government or issued by a central bank. Because of this, inflation rates, monetary policies, and economic growth don’t have any influence over its value. Conversely, numerous other factors do:
- Bitcoin’s market supply and demand;
- The different exchange rates across cryptocurrency exchanges, such as Coinbase;
- The regulations that control Bitcoin trading;
- Bitcoin’s inner governance;
- Bitcoin rewards;
- The number of digital currencies that are competing against Bitcoin;
- Bitcoin’s liquidity.
Bad Press and Adoption Rate
As Bitcoin’s popularity increases, the currency attracts more and more attention among the general public. The main reason for the popularity of Bitcoin and that of other digital currencies is the fact that governments cannot regulate them. Moreover, there is no central authority to decide on the movements of the digital currency environment.
Because of several bad events, like the bankruptcy of the Silk Road and Mt. Gox, Bitcoin has ended up in numerous press headlines. These bad events led to a decline in the reputation of digital currencies around the world and that gave governments more reasons to force regulations upon them.
Due to the fact that the press uses these opportunities to raise fear and suspicion in viewers and readers, the public perception of Bitcoin leads to a lot of changes in its value as their distrust can cause its price to fall. On the one hand, public opinion has an enormous impact on price fluctuations, but on the other, it’s also a sign of the evolution of the cryptocurrency market.
Bitcoin’s Perceived Value
Another reason for BTC fluctuations is the store of value they are perceived to have, i.e. the customers’ perception of the value of Bitcoin in comparison to other altcoins. There’s one particular quality of Bitcoin that makes it different from fiat currencies – its limited supply.
In fact, Bitcoin is limited at 21 million BTC, and as the number of mined bitcoins continues to get higher, the mining difficulty increases proportionally. Once all 21 million BTC are mined, Bitcoin’s pricing will rely on its legality, practicality, and demand.
High Profile Losses
When traders face losses due to security breaches on exchange platforms and the press informs the market of such a breach, it increases the effect of price volatility on Bitcoin. These Bitcoin losses reduce the overall flow of BTC, and this can lead to a potential rise in the value of the remaining BTC due to their enlarged scarcity.
However, overriding this rise is the negative outcome of the media hype cycles that would follow, causing Bitcoin’s price to plummet once again. This is a malicious cycle that has an influence on people’s perception of Bitcoin’s long-term value.
Security Breaches Create Volatility
The fact that Bitcoin is developed on an open-source platform allows users to examine the copy of the source code and the algorithm. Because of this, in case of security issues, users can share their security concerns with the online Bitcoin communities and ask other users to help them solve the security problems.
However, this is a major reason for Bitcoin’s volatility, as some of these people from the online Bitcoin community that might be interested in investing in Bitcoin can consequently get concerned about its security problems.
Bitcoin, according to the Internal Revenue Services (IRS), is considered an asset for tax purposes. A statement like this that comes from high authority and recognizes the status of the cryptocurrency has a good impact on its market value.
However, this decision of the IRS has at least two different negative implications on the cryptocurrency. The first one is that this makes using Bitcoin as a form of payment more difficult for users. According to the new tax law, users will have to file the current value of Bitcoin for every transaction, regardless of how small it is. The filing of every Bitcoin transaction can slow down the process of accepting cryptocurrencies as a payment method by merchants worldwide.
The second negative effect is calling the digital asset a form of possession used for tax purposes. For some market participants, this can signal that the Internal Revenue Services is getting ready to implement stricter regulations and this, in turn, can affect the adoption rate of the cryptocurrency.
Uncertainties of the Future Value of Bitcoin
There is no mechanism that can help us predict the future value of Bitcoin. However, there are two methods that can help us induce the volatility of Bitcoin: value transfer and store of value.
The method of value transfer refers to transferring resources in the form of digital assets from one place to another.
The store of value is an activity that can be used to store digital assets and that can be useful in the future, but only with a certain level of predictability. In the future, the saved store of value can be exchanged for services or goods.
Large Holders Of Bitcoin
Early adopters have managed to obtain a significant amount of Bitcoin. The value of the adopters’ stocks can be counted in millions now and they have a limited number of options of what they can do with the digital assets.
The number of bitcoins in the world is limited and this lack of bitcoins makes things more complicated for large holders. If they liquidate their holdings into fiat currency, they risk putting the market on an edge. Large holders have a limited option value because of the small Bitcoin adoption.
A Few Words Before You Go…
So, after all that we said about Bitcoin, we can conclude that this cryptocurrency has a rather unstable value, meaning that Bitcoin’s price fluctuates very often. However, the fluctuation of Bitcoin can be lucrative and taken advantage of, and it can drive traders’ profits upwards.
Hopefully, the information that we presented will help you better understand what determines Bitcoin’s value and what are the main reasons that cause its fluctuation. This way you can keep them in mind if you decide to invest in the world’s first digital currency. Good luck!