The Nature of Bitcoin and Its Volatility

With the world racing toward more and more digitization, it would make sense for money to do the same — with cryptocurrency being the end result.

As the world continues to embrace digitization, it's natural to wonder why money hasn't followed suit — with cryptocurrency being the ultimate digital currency. But despite its introduction a while back, mainstream adoption of crypto seems to have stalled, remaining largely confined to "crypto bros" and a few risk-tolerant individuals experimenting with it.

For most people, Bitcoin's price still feels like a guessing game, and something highly volatile. So today, let us quickly take you through Bitcoin and its volatility.

The Nature of Supply and Demand

First and foremost, the primary reason for Bitcoin price volatility is the simple economics of supply vs demand. Supply plays a major role here since Bitcoin is a digital, deflationary asset with a fixed capped amount of only 21 million. So, if at any point in time the supply becomes less while there's demand for owning it, then logically the price has to be bid up.

Media Influence and Market Sentiment

Even media and news play a role in the crypto space. A simple tweet from Elon Musk about Bitcoin can change the price of the cryptocurrency within seconds. If the news, or the general market sentiment, has a positive tone to it, then it'll lead to Bitcoin going up and vice versa.

The Role of Speculators and Investors

Bitcoin was created as a currency for “the people.” The middleman was supposed to be removed. However, Bitcoin has become a commodity traded by both retail traders and institutional traders. When more participants enter any arena, speculation naturally becomes part of the deal (or game). Most traders in Bitcoin now are not looking to be investors for the long run; rather, they are looking for a “get-rich-quick” scenario, with the day trading and haggling over pennies most of the time.

In this context, the more people speculate, the bigger the price movement, especially if leverage comes into play. The Bitcoin market on Binance is through the roof.

Regulatory Developments

Blockchain regulation is a very fluid aspect. Digital currency, be it Bitcoin or others, is very new, and most developed countries that are trying to integrate such currencies into their economy have no clue as to how to go about it. This creates a lot of volatility. Any country making new regulations can destroy or cripple demand, thus resulting in major drops in prices in a short duration of time.

Technological Innovations and Market Infrastructure

The infrastructure supporting blockchain markets is in flux. New technology is being created (e.g., the Lightning Network) that enables faster confirmation/settlement of transactions. More people can generally use the technology if it all works as intended. More users = less volatility as bitcoin is meaningfully integrated into the financial system; more stability over time with the potential of explosive price increases.

But if something doesn’t work as intended or systems are compromised – boom! The prices become bust!

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As Bitcoin is increasingly integrated into the global economy, being aware of these things will help you navigate the crypto waters. If you know what influences the price of Bitcoin, you can better frame your decision-making in the arguably wildest market space available.