Research Round-Up: A Deep Dive on Why Bitcoin is so Volatile

The U.S. dollar is not volatile but has also not been a good store of value in terms of https://www.xcritical.com/ purchasing power, while bitcoin is considered very volatile, but has been a much better store of value over the past ten and even five years. The point is that something that has low volatility is not necessarily a good store of value in the long run, while something that has high volatility does not mean that it can’t be a good store of value in the long run. An example of a different good or commodity can help illustrate this, such as oil. The world demand for crude oil has been almost always increasing, only declining for brief periods during recessions. However, the long-term price has not shown a similar pattern of only ever increasing. In fact, the inflation adjusted price of a barrel of WTI crude oil has actually declined nearly 9% over the past 15 years while demand is up approximately 14% (using prices as of the end of 2021 according to Bloomberg data).

Investors Have Routinely Overestimated Bitcoin’s Volatility

Bitcoin is unique in that it is a good whose supply is completely inelastic to changes in price. In other words, supply does not (and cannot) change in response to price. Therefore, all crypto volatility trading changes in demand for bitcoin will be reflected by changes in price.

The crypto market is small in terms of capitalisation

A store of value is an asset’s function that allows it to maintain value in the future with some degree of predictability. Many investors believe that Bitcoin will retain its value and continue growing, using it as a hedge against inflation and an alternative to traditional value stores like gold or other metals. Additional information about your broker can be found by clicking here.

A Market Built Heavily on Sentiment

It is for informational purposes only and is not intended to constitute a recommendation, investment advice of any kind, or an offer or the solicitation of an offer to buy or sell securities or other assets. Please perform your own research and consult a qualified advisor to see if digital assets are an appropriate investment option. First, it is helpful to distinguish between short-term and longer-term volatility. These are some of the same factors that drive short-term volatility for stocks and other assets as well and is therefore not as hard to comprehend. Bitcoin’s hash rate has, yet again, reached a new all-time high this month. We don’t see this stopping anytime soon either as many of the large public mining operations have purchase orders still waiting to be fulfilled.

The crypto industry is in the dumps. So why is bitcoin suddenly flying high?

• Many cryptocurrencies have implemented uses for their coins and tokens on platforms such as Decentraland (based on the Ethereum blockchain) encouraging demand of the token.
• When it comes to safety, both stocks and cryptocurrencies present their unique set of risks.
• Because news and media outlets are businesses that need content for their readers and viewers, they often present information and predictions from “experts” that are not always verified by evidence other than opinions.
• However, the long-term price has not shown a similar pattern of only ever increasing.
• Second, it is encouraging to see the response by Jump Crypto stepping in to make the users whole and taking steps to further secure the network.

With Bitcoin (BTC) and Ethereum (ETH) maintaining their positions as leading cryptocurrencies, investors are optimistic about the market’s trajectory. Binance Coin experienced a minor decline of -0.50% to INR 46,545.27, yet maintains a very bullish technical rating. With a pivot level between INR 48,831 ($589.04) (24H High) and INR 47,633  ($550.47) (24H Low), BNB continues to showcase its resilience and attractiveness to traders and investors.

Should Investors Welcome Bitcoin’s Volatility?

Additionally, many cryptocurrencies are marketed as speculative investments, which attracts investors looking to make quick profits. These investors may be less concerned with the asset’s long-term value and more focused on short-term price movements, which can further exacerbate the cryptocurrency market’s volatility. The main reason for this was increased awareness of and capabilities for alternative coins. For example, Ethereum has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi) applications. Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether (ETH), the cryptocurrency used as “gas” for transactions on its network. Ethereum accounts for about 15% of the overall market cap of cryptocurrency markets.

Speculative Trading and Investor Sentiment

In 2020, market sentiment contributed significantly to rising prices for cryptocurrencies as many individuals used their government support payments to invest in cryptocurrencies – especially given low returns from bank deposits. The recent surge in cryptocurrency prices, coupled with positive developments such as the approval of Bitcoin Spot Exchange Traded Funds (ETFs) by regulatory authorities, has fueled expectations for further gains. Additionally, anticipation is building around the upcoming Bitcoin Halving event scheduled for April 2024. These factors are likely to attract more investors and drive increased trading activity in the crypto market. The price of bitcoin traded in a 25% band throughout February, reaching a high of nearly $45,000 before ending the month in the low $40,000s. Much of this price action has been correlated to risky assets in general, including U.S. equities, as markets brace for potential rate hikes in March and the increasing conflict between Russia and the West.

But that group did not all come to that belief at the same time, nor in the same way. Each individual had to go through the process of understanding bitcoin and its value proposition. Some may have purchased and held at different times, while others may have first traded it before choosing to make a long-term allocation. Second, it is encouraging to see the response by Jump Crypto stepping in to make the users whole and taking steps to further secure the network. This speaks volumes to the institutional awareness and support, and also shines a light on the collective effort and interests of everyone involved in managing the integrity of these ecosystems.

The end of the crypto winter looms: These are the tailwinds that are driving Bitcoin again

The distribution of Bitcoin also plays a role in rapid price movements. Bitcoin gets a lot of public attention, but its market capitalization is only ~$1 trillion, only 10% of gold’s market cap. This makes it possible for a single entity or wealthy individual to single-handedly affect the price by buying or selling bitcoin. As demonstrated above, we believe there is a classic psychological narrative that links the relationship between bitcoin’s realized volatility and addresses in profit known as seller energy.

Coins use their own blockchains to record transactions between two parties and are often used for storing and transferring a form of money. Examples include Bitcoin and Ethereum, which are the two largest cryptocurrencies currently in existence. Bitcoins are recognized as a form of currency in many countries, but only one considers them legal tender. Outright bans exist in China, Algeria, Bangladesh, Saudi Arabia, Morocco, Nepal, Pakistan, Bolivia, and Tunisia. Investors also influence prices when they become too excited about an asset, causing it to be overvalued. The absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies.

The speculation around Bitcoin is exacerbated by the nature of the asset. Bitcoin’s value as an investment purely depends on the future value of Bitcoin. Alternatively, most assets are priced based on the future value of their cash flows.

However, in contrast, cryptocurrencies are a relatively new asset class and have recently gained popularity. Despite their increasing popularity, cryptocurrencies are often considered more volatile than traditional stocks because of the following prominent reasons. High volatility is a perfect opportunity to buy crypto at a lower price and increase profits in the future. However, it is worth weighing the risks and investing in time-tested coins. The information herein was prepared by Fidelity Digital Asset Services, LLC and Fidelity Digital Assets, Ltd.

Influenced by some positive news, bitcoin managed to recover and even reach an all-time high of $69,000 several months later. At the end of 2022, the U.S. government cracked down on the crypto industry, which now affects volatility since the market reacts to each piece of news from the authorities. The founder of the first cryptocurrency, Satoshi Nakamoto, set bitcoin’s supply limit to 21 million.

“Lower rates are bullish for bitcoin,” Greg Magadini, director of derivatives at crypto data firm Amberdata, told CBS MoneyWatch. Although the cryptocurrency industry remains shadowed by recent blowups and controversy, the world’s most important token — bitcoin — is making a comeback. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Investing in virtual currency has produced jaw-dropping returns for some, but the field still presents risks. Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. Statista data shows similar movement in digital wallets – a sign that more retail investors are diving into the industry in the wake of the pandemic.