Bitcoin has historically exhibited high volatility or high measures of standard deviation, but when examining its returns, many are disproportionately skewed to the positive side. Many of the factors that drove Bitcoin’s volatility in the past will become less relevant as time goes on. Countries around the world Digital asset are progressively adding rules to govern how their citizens can use the currency. As the long-term regulations around Bitcoin become more clear, price volatility should decline.

Regulatory Landscape and Government Actions

This era may see an influx of retail and institutional investors acknowledging Bitcoin’s legitimacy and potential as a cornerstone of modern portfolios. Despite maintaining its volatile nature, Bitcoin proved its principle in 2021 by reaching new all-time highs, demonstrating that it wasn’t just a one-time bubble. This phase was a testament to Bitcoin’s staying power, solidifying its role as more than just a digital curiosity but a genuine asset class. Let’s trace Bitcoin’s price history’s significant crypto volatility ups and downs, highlighting key events like the 2017 bull run, 2021 all-time high, and notable market crashes. The timeline below maps out Bitcoin’s price movements over the years, emphasizing the big spikes and drops.

Effects of Supply on Bitcoin’s Price

However, what this also means is that a greater proportion of crypto investors are naive than in traditional financial markets. This is not only due to possible inexperience but also due to the fact that the financial need for that money is more immediate and critical. Stock market or derivative investors are less likely to need their money to hand, and of course institutional capital, with its longer-term planning cycles, is still primarily invested in traditional markets. Prices can change when an announcement is made that drastically affects how the asset functions and/ or if a new company starts accepting cryptocurrency for payment. When Elon Musk announced that Tesla would start accepting Bitcoin as payment in March 2021 there was an initial rise in demand resulting in a rise in value. Most cryptocurrencies like Bitcoin are purely digital assets and aren’t https://www.xcritical.com/ backed by anything physical like a currency or commodity.

Investors Have Routinely Overestimated Bitcoin’s Volatility

Let’s assume that we have a bunch of players around a table with one of those cheapie poker chip sets, which has white, blue and red chips. Let’s say that Bitcoin is the red chip, and the blue and white chips are some other cryptocurrencies. The hodlers are bolstered in their efforts to defend Bitcoins’ price by the desperate, being folks who bought into Bitcoin when it hovered north of 15,000 and then promptly lost half or more of their money. These poor (literally) folks are doubling-down on Bitcoin, much like a gambler who has lost a bunch of money, and then gambles the balance to try to make it back up. Many of these folks have been buying Bitcoin on credit, and in fact at least one study suggests that as much as 20% of Bitcoin purchases have been on credit. Contrary to popular perception, economic bubbles do not collapse completely in a single day as with a balloon popping, but usually take some months to fully deflate.

Thus, cryptocurrencies are denied access to that largest ocean of wealth, and instead must rely on individual investors worldwide. Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for investment dollars. In 2017, it accounted for more than 80% of the overall market capitalization in cryptocurrency markets. Rising energy costs directly impact mining activity and have led to a reduction in the number of people creating new bitcoins. New rules and regulations can also affect prices (an announcement by the People’s Bank of China in September 2021 resulted in a fall of 3.65% in the value of a bitcoin). However, as well as being affected by supply and demand, some cryptocurrencies are also impacted by market sentiment and media coverage.

The most recent halving occurred in April 2024, reducing the block reward from 6.25 Bitcoins to 3.125 Bitcoins. Unlike traditional currencies, which central banks can issue indefinitely, Bitcoin has a maximum quantity that will ever exist, set at 21 million. Bitcoin’s inherent volatility stems from a complex interplay of market factors—chief among them being its relatively nascent stage as a financial asset.

The distribution between supply and demand plays a major role in the volatility and price movements of any asset. However, it is particularly nuanced in the crypto space due to the unique supply dynamics of many different digital assets. All of these factors combine to push the cryptocurrency prices in seemingly random directions at random time intervals.

During 2022, cryptocurrencies fell in value – some as small as 5% through to the 50% decrease that Bitcoin experienced. A key reason was rising US interest rates – providing investors with additional sources of yield enhancement (typically unattractive during the preceding period of sustained low interest rates). In addition, the turbulence in the decentralised finance (DeFi) space, and the failure of FTX affected general market sentiment towards all cryptoassets. Some cryptocurrencies can be more heavily affected by normal supply and demand. As some cryptocurrencies become more popular, especially if they have a small market cap, a large influx of new investors can quickly drive up prices significantly.

• That means that their price is set entirely by the laws of supply and demand.
• It is important to remain conscious, however, that for now at least volatility is baked-in, and to therefore plan accordingly.
• Bitcoin is characterised by high volatility due to a number of the above-mentioned reasons, but is volatility always a bad bad thing?
• During 2022, cryptocurrencies fell in value – some as small as 5% through to the 50% decrease that Bitcoin experienced.
• The bonds in the Bond Account have not been selected based on your needs or risk profile.
• The information herein was prepared by Fidelity Digital Asset Services, LLC (“FDAS LLC”) and Fidelity Digital Assets, Ltd (“FDA LTD”).
• While this volatility presents opportunities for traders, it also represents risks for investors looking for stability.

Compared to more established markets, the capacity to buy or sell large amounts without affecting the market price is limited. China’s government and central bank announced in 2021 that all cryptocurrency transactions or facilitation were illegal. Bitcoin mining was cracked down upon following a meeting of the State Council Financial Stability and Development Committee in May, which resulted in a massive shutdown of cryptocurrency mining farms in the country.

Tokens don’t use their own blockchain, but instead, become part of an existing blockchain. As a result, they are much easier to create and can be used alongside a software application to verify and authenticate identity. Tokens are often issued to investors during an Initial Coin Offering (ICO) in exchange for funding.

As big financial players compete for ownership in an environment of dwindling supply, Bitcoin’s price will likely fluctuate in response to any actions they take. To better understand crypto market volatility, get set up with a personal broker today. Evaluating technology options for innovation in marketing – do you know your Hype Cycles? If you’re involved in marketing strategy development, you will be constantly making judgments and reviewing with colleagues which digital technology innovations are most relevant to your …..

As Bitcoin represents nearly 50% of the total cryptocurrency market cap, the public typically considers Bitcoin as either the main or the most secure coin. Often when Bitcoin decreases in price, altcoins can fall even more as there remains a positive sentiment underpinning Bitcoin as well as greater name recognition. Throughout 2023, we saw a rise in bitcoin’s market cap and falling levels of realized volatility. There has never been another instance where bitcoin’s market cap was over $500 billion, and its one-year realized volatility was lower than 50% until now.

This lack of management in supply and demand has created such a condition that the prices of cryptocurrencies are very volatile daily. First, we will get to know about the cryptocurrency market, and the players active in this market, and then we will explore the factors that have made cryptocurrencies so volatile. Even as the asset class has matured, we can’t ignore the fact that Bitcoin remains a speculative investment. As a result, it is still prone to the same emotional and psychological market forces that can overwhelm traditional financial assets in a crisis.