Why Do Bitcoin Prices Fluctuate So Much?

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There are a lot of people who are looking for ways to diversify their investments. One of the ways to do this is to target something called cryptocurrency. This is a virtual currency that exists in the digital world. It operates using a decentralized, distributed network that translates virtual currency into real value. By far, the biggest option is called Bitcoin. Those who are thinking about their portfolio are probably aware that Bitcoin is a thing. There are lots of prospective investors that have taken a look at Bitcoin and see that the price of Bitcoin fluctuates wildly from day to day. The more something fluctuates, the more risk is involved in it. Therefore, taking a look at the fundamentals of Bitcoin and trying to compare this any other stock might be hard for those with a traditional mindset when it comes to investments. This might even scare people away from using Bitcoin; however, the reality is that Bitcoin can still be a great investment for many people. People simply need to take the time to understand Bitcoin, why the prices change so much, how they change, and how this fluctuation can be used to turn a sizeable profit. There are a few important points that people need to keep in mind when it comes to the price of Bitcoin.

The Calculation of the Price of Bitcoin

First, it is important to take a look at the price of Bitcoin and how it changes. Every price fluctuation has a reason. Even if a stock tips by 1 percent in one direction or another, there is usually a reason why. It all goes back to supply and demand. With the world of Bitcoin, the supply side is usually clear. The supply of Bitcoin has been designed to try to keep price fluctuation to a minimum. Even that addition was not added intentionally; however, the reality is that there is a set number of coins that can and will be mined in the world of Bitcoin. Even the rate at which they are being introduced into the supply has been set. The only unknown that exists out there is the number of coins in the world of Bitcoin that might be lost and will not be heard from again.

Therefore, in order to take a look at who and why the price of Bitcoin fluctuates, it is a good idea to take a look at the demand. The demand is tricky but it is the demand that is responsible for the fluctuation of the price of Bitcoin itself. In the end, there are a handful of factors that play a role in the demand for Bitcoin. They include:

  • How Bitcoin is being adopted by other users and entities
  • Whether or not the use of Bitcoin is going to be expanded in the near future
  • Those who are involved in Bitcoin for the purpose of price speculation
  • The market is a bit small, which allows users to tip the scales of the Bitcoin market with relative ease
  • The overall lack of regulatory constraints, meaning that the market tends to operate on the faith of the users

As a whole, the price fluctuation in the world of Bitcoin ultimately depends on what people are using Bitcoin for. Calculating the demand for Bitcoin is simply impossible. The reality is that this is an abstract concept that is simply hard to objectify. While it is true that Bitcoin is a currency, some people look at it as a form of digital gold. Given that money today is not backed by gold, this simply complicates things even further. In a traditional economy, interest rates are used to control the value of money when it comes to inflation and deflation. Bitcoin has no interest rate. The value is set even if the price and utility change from time to time. Therefore, the rate of inflation or deflation is elusive and hard for people to grasp even though the purchasing power is a function of its demand. In truth, Bitcoin doesn’t have a national economy backing it up. This makes it even harder for people to wrap their minds around. Therefore, the demand for Bitcoin does play a role in its price; however, it is hard for people to conceptualize.

Bitcoin As a Way to Store Value

The adoption of Bitcoin certainly influences the price as well as its ability to store value. The adoption is not a straightforward metric as there are people who do not use Bitcoin as a form of currency. Instead, it is better to take a look at Bitcoin as a way for people to store value. They use Bitcoin as a way to hedge their risk when it comes to the traditional economy. In this manner, there are lots of people who are starting to see Bitcoin as a source of value, meaning that it is only going to become more important in the future as traditional economies continue to have problems.

The True Driver of Bitcoin Volatility Is the World of Speculation

Yes, there are lots of people who trade Bitcoin and see it as a source of value as the demand goes up and down; however, the true reason why the value of Bitcoin is those who use Bitcoin to speculate. For those who might not know, speculation involves people who jump into and out of the market in a short amount of time, trying to make a few bucks on the ups and downs. These are people who have been in the game for a long time, know what the trends are, and know how to use the trends to make money. They are the biggest reason why the price of Bitcoin goes up and down at such a high rate

These are only a few of the many factors that are involved in the price of Bitcoin. While the prices do fluctuate quickly, there is still an opportunity for people to turn a profit.

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