High-risk investments are nothing new. While these methods for portfolio diversification have a large chance of missing financial goals or even losing capital, weathering fluctuations, such as Bitcoin volatility, can also have incredibly worthwhile rewards.
Still, this type of investment is not for everyone and should be carefully considered. Bitcoin is one of the most volatile assets on the market, and the outcomes are often unpredictable.
In this article, we explain the fluctuating value of Bitcoin, the many reasons behind its volatility, and what it means for you as an investor.
The History Of Bitcoin
To fully understand Bitcoin’s volatility, we need to first take a look at a brief timeline of Bitcoin.
The first major price increase happened in 2010, one year after it was founded. Its value soared to $0.09 from practically nothing.
Another year later, the value increased once again, hitting a peak of $1 in April. And in June of the same year, it increased by 2,960% to just below $30. Although this value crashed to $2.05, it would eventually reach hundreds and then thousands of dollars.
For example, it was in 2017 that Bitcoin truly captured the world’s attention, jumping from $2,000 to $19,345.49. This changed the notions many had surrounding decentralized finance, paved the way for crypto competitors, and shaped the high values that Bitcoin holds today.
So, how did this digital currency start from virtually nothing and reach an all-time high of $68,990.90? To really evaluate this, let’s take a look at a few factors that contribute to Bitcoin’s volatile nature.
Reasons For Bitcoin Volatility
There are many reasons why an asset is considered volatile. Volatility is simply a measure of an asset’s value deviation from its mean performance or a predetermined benchmark over time. In other words, the value of a volatile asset is likely to have large swings from the norm.
With this in mind, it’s no surprise that Bitcoin sees the same type of volatility that similar unpredictable options have as well.
From its unique source of value to media perception, here are just a few of the reasons that Bitcoin value is so unpredictable.
Cryptocurrency has come a long way since 2009. Still, it remains unregulated today, which naturally creates uncertainty among the general public.
The hopefulness surrounding crypto’s eventual regulatory framework results in more people buying bitcoins, while crackdowns on the virtual currency (like the recent events in China) cause concern and lead to more people selling.
All this to say: Government views on the matter can play a sizable role in the value of cryptocurrency and impact its supply and demand.
Supply And Demand
Just like any volatile asset, supply and demand are some of the primary factors of Bitcoin’s wild fluctuations. This is further influenced by the fact that there is a limited amount of bitcoins that will be available. In fact, once 21 million bitcoins are created, that’s it for the supply.
The number of coins in circulation and the amount that people are willing to pay both heavily impact the crypto market. As the available number of bitcoins gets closer to the 21 million mark, the higher its value will likely become.
As this price increases, fewer people will demand the asset while more sellers will supply it, and vice versa.
In the next section, we’ll discuss what happens when Bitcoin investors’ strategies come into play.
Some markets require years of education or experience to understand and invest in. But innovative technologies, automated trades, and easy-to-use crypto exchanges make it so that anyone can get involved in the DeFi market’s crypto exchange.
Anyone with internet access can become a Bitcoin investor, and the financial requirements are not as high as you might expect. For example, Venmo’s recent integration of Bitcoin has taken off with the slogan, “Get started with as little as $1.”
The wide variety of traders, both novice and experienced, creates a market susceptible to its own investors. Should the price of Bitcoin suddenly drop, some investors will hold their assets while others will panic and quickly look to sell, impacting the supply and demand.
Standard Of Value
A major component of Bitcoin is that it has no intrinsic value, making it difficult to quantify. Although it is often likened to commodities such as gold, Bitcoin’s digital makeup places it in a category of its own.
As of now, Bitcoin activity is heavily based on speculation. The value it is given depends on the opinions of new and seasoned investors and how they decide to buy or sell.
Compare this to a historical instance like the Gold Standard. To combat the instability of a currency system that relied on banknotes, most developed countries were valuing their banknotes based on a specified amount of gold.
This standard was designed to stabilize the value of a particular currency. But Bitcoin can be exchanged for anywhere between $30,000 and $70,000 at any given moment, with plenty of room to fluctuate.
For anyone worried about missing their chance to invest in Bitcoin due to its dwindling supply, there’s no cause for concern. Experts predict that it will be another century or so until the last bitcoin is mined.
Even so, this timeline has not prevented key investors from controlling large sections of the Bitcoin market. Elon Musk, Mark Cuban, and the Winklevoss twins have risen as key names in crypto investment.
These names tie directly into how Bitcoin is viewed by the media. In fact, when it comes to cryptocurrency and other investment opportunities, the media can also affect value. And the actions of these well-known investors are more than likely to shift opinions one way or the other.
For example, we saw this in the case of Musk’s Dogecoin Tweet. After it was posted, Dogecoin’s value rose by about 6.5%.
Headlines that hint toward “the next big thing,” possible fluctuations in value, crypto hackings, platform bankruptcies, or scams will skew how investors buy and sell.
What Bitcoin Volatility Means For You
One of the main reasons that anyone invests in high-risk opportunities is that it can mean high rewards. In the case of Bitcoin, we see this for anyone who owned BTC at $2,000 only to watch it increase to $20,000.
While this does not mean that you should go purchase thousands of dollars worth of Bitcoin, it does mean that volatility can have a beneficial outcome.
As you’re working to successfully navigate this chaotic market, following the statistics makes it simpler.
Keeping Up With Trends
If you choose to invest in crypto, then you’re likely going to be following the market trends to form any decisions to buy, sell, or trade. Even an asset as volatile as Bitcoin still follows trends for short periods of time.
You can lower your risk by learning how to interpret the data of price charts to spot trends and determine when the value will be high or low. Although this is a very technical skill and is difficult to learn, it is a useful way to better predict your next move.
An important question that many new investors have regarding Bitcoin volatility is whether these rapid shifts in value make it unsafe.
The simple answer is no, volatility itself is not a cause for safety concerns. That being said, there are other safety concerns surrounding Bitcoin — but most of these stem from how it is stored.
From the storage of private keys to cyber threats targeting crypto exchanges, the current lack of regulation means that investing in any cryptocurrency today could result in compromised safety.
It’s important to mitigate your risk by diversifying your portfolio. For example, investing in multiple crypto options can help balance out your risk factor, and choosing the right exchange to store your assets can make all the difference in your financial success.
Reduce Bitcoin Volatility With Vauld
For the foreseeable future, Bitcoin volatility is a key part of its success. While many argue that the value needs to be stabilized for it to be accepted as a streamlined currency, others appreciate it specifically for its benefit as a high-risk investment.
As you’re building your portfolio, the good news is that not every cryptocurrency is volatile. Stablecoins exist for the sole purpose of offering a crypto option that is backed by a commodity such as gold or fiat currency such as USD.
The best way to make the most of your wealth-building journey is to know you’re in good hands from the start. Customer protection and company transparency are always top priorities at Vauld so you can earn more and worry less.
Along with an arsenal of security features, Vauld users get regular upgrades, the highest quality of customer service, and competitive rates. No matter which tokens you decide to store, you’ll start earning as soon as you make your first deposit.