It goes without saying that the Bitcoin price index has been on a rollercoaster ride, especially in Q4 2017 and Q1 2018. Why such extreme volatility? Here are four possible culprits contributing to the wild price swings.
At this time last year, Bitcoin was trading at a price slightly higher than $2,000, according to CoinMarketCap. By the end of 2017, it had reached its all-time high (ATH) of around $20,000 and a market cap of more than $325 billion, marking an unprecedented surge. Yet, the first quarter of 2018 hasn’t been nearly as euphoric for the largest cryptocurrency, either in terms of market capitalization or price. At press time, Bitcoin is trading at $8,406 and has a market cap of just over $143 billion – a loss of more than 50% of its December 2017 value.
So yes, Bitcoin is, without a doubt, volatile but before you throw up your hands and start wondering if maybe the Bitcoin Bubble Brigade was right, let’s take a look at some of the possible causes of its instability.
1. Economy 101: Supply and Demand
The concept of supply and demand is one of the basic laws of economics. In a nutshell, the rarer something is and the more in demand it is, the higher the price will be.
Bitcoin’s protocol has pre-determined the number of coins that will ever be in circulating supply – it’s 21,000,000. There are now less than 4 million bitcoins left to be mined. and with the increasing popularity of the cryptocurrency field in general, scarcity seems to have an impact on price.
Of course, we’ve also seen prices fall as a result of the same mechanism. Every time Nobuaki Kobayashi, the Mt. Gox bankruptcy trustee, moves large quantities of bitcoins from the fund’s cold wallet, prices begin to drop in anticipation of the market being flooded.
This is where the media comes into the picture. It doesn’t mean that the media is to blame for the volatility of Bitcoin’s price, but it’s the main medium through which information is shared.
Opinions, and especially the behavior of investors, have a serious impact on the price of this virtual asset. But this isn’t an isolated matter – investors’ opinions have always had an impact on virtually any publically traded asset.
In other words, when a popular investor shares positive sentiment about Bitcoin or any other virtual currency and this news reaches the masses, it’s possible that its price is going to appreciate. On the other hand, when a world-renowned name such as Warren Buffet says that Bitcoin is like ‘rat poison,’ this might have a negative impact on the cryptocurrency’s price.
3. Regulations Matter
While a lot of people see legislative regulations as something bad for the crypto field, it’s actually the exact opposite. While it has been around for almost a decade, Bitcoin came to fame in 2017 due to its massive price spike. In other words – in the eyes of the regular person, this is a relatively new field.
There’s nothing that a new market needs more than clear, concise, empowering regulations, which provide potential investors with some security and a framework they can understand.
How regulations are handled can impact the price of Bitcoin and other virtual currencies. When earlier this year China announced that it was banning Initial Coin Offerings (ICOs), the price of Bitcoin dropped by 5%, while Ethereum (ETH), which is the second largest cryptocurrency in terms of market capitalization, dropped by more than 12%. This is a clear example that a straightforward regulatory move of the kind can have a tremendous impact on Bitcoin’s price.
4. Internal Changes
Part of Bitcoin’s appeal is that there is no single entity which controls it. However, occasionally, the Bitcoin community as a whole makes certain decisions on how its underlying blockchain-based technology is to work. Serious attempts to change the native rules of Bitcoin might result in an alteration, which is referred to as a fork. It might cause massive changes to the way the entire blockchain functions.
A major fork for Bitcoin was the Segregated Witness (SegWit). It suggested that the block size of the network should be increased from 2MB to 4MB by 2018. Its main intention was to speed up transactions. Yet, amidst the community-driven uncertainty of whether this developer-backed proposal would pass back in July 2017, we saw a massive price volatility – depreciating to $1,900 and bouncing back to $2,700 in a matter of a few days.
It’s obvious that there are quite a lot of factors which are affecting the price of Bitcoin. These are far from being the only ones that matter, but they are surely things that need to be taken into consideration.