Price fluctuations in the Bitcoin spot exchange rate on cryptocurrency trading platforms are driven by many factors.
The volatility index in traditional markets is measured by the volatility index, also known as the volatility index (VIX).
Recently, the Bitcoin volatility index has also become available.
Known as the Bitcoin Volatility Index, it aims to track the volatility of the world's leading digital currency in terms of market value over different time periods.
Bitcoin's value has historically been volatile.
In the three-month period from October 2017 to January 2018, for example, Bitcoin's price volatility was close to 8%.
This is more than double the volatility of Bitcoin in the past 30 days ending January 15, 2020.
Why does Bitcoin's value fluctuate?
Bad news takes a toll on adoption rate
News events that scare bitcoin users include geopolitical events and government data that are likely to be regulated by Bitcoin.
Among the early adopters of Bitcoin were several bad actors in the past, who produced major news stories that spooked investors.
Bitcoin news making headlines over the decade or so of the cryptocurrency's existence includes the bankruptcy of Mt. Gox in early 2014, and more recently "Youbit" trading platform.
Among other news that shocked investors was the high-level use of Bitcoin in drug dealings and the purchase of weapons via the "Silk Road" store or the so-called "Silk Road" on the dark internet that ended with the FBI closing the market in October 2013.
All these accidents and the public panic that followed drove the value of Bitcoins against fiat currencies to rapidly decline.
However, currency investors viewed those events as evidence that the market was maturing, which resulted in the value of Bitcoins appreciating against the dollar significantly in the short period immediately following the news events.
Bitcoin fluctuation:
One of the reasons behind Bitcoin's volatility against digital currencies is the perceived store of value against fiat currency.
Bitcoin contains gold-like properties.
It is governed by design by core technology developers to limit its production to a fixed amount of 21 million Bitcoin units.
Given that this differs significantly from paper currency, which is managed dynamically by governments that wish to maintain low rates of inflation, high employment and satisfactory growth by investing in capital resources, as economies built with fiat currencies show signs of strength or weakness, Investors may allocate more or less of their assets to Bitcoin.
Uncertainty about Bitcoin's future value
Bitcoin's volatility is also due in large part to divergent perceptions of the cryptocurrency's intrinsic value as a store of value and the method of transferring value.
Store of value is the function by which an asset can be useful in the future with some predictability.
Store of value can be saved and exchanged for some future goods or services.
A method of transferring value is any object or concept used to transfer ownership in the form of assets from one party to another.
Bitcoin's volatility at the moment makes it a somewhat inconspicuous store of value.
As a result, we see that the value of Bitcoin can fluctuate based on news events just as we observe it in fiat currencies.
The Bitcoin whale movement:
Bitcoin volatility is also partly driven by the campaign of those with large proportions of the total currency.
For bitcoin investors whose current holdings exceeds about $ 10 million, it is not clear how they will sell their deficit and large position without moving the market too much.
In fact, it may not be clear how they would describe a position of this size in a short period of time at all, because most cryptocurrency exchange platforms impose 24-hour withdrawal limits much below this limit.
Security breaches:
Bitcoin can become volatile as the Bitcoin community reveals vulnerabilities in an effort to produce massive open-source responses in the form of security fixes.
Bitcoin developers must disclose security concerns to the public in order to produce robust solutions.
It was the hack that drove the Youbit platform into bankruptcy while many other cryptocurrencies grabbed headlines for being hacked or various theft stolen.
For example, in April 2014, the OpenSSL vulnerabilities attacked by “Heartbleed” and reported by a security official at Google, led to a 10% drop in Bitcoin prices in one month.
Feelings of fear.
It should be noted that the aforementioned thefts and ensuing news of losses had a dual effect on volatility.
They have reduced the overall supply of Bitcoin, resulting in a potential appreciation of the remaining Bitcoin due to increased scarcity.
However this lift was bypassing the negative impact of the news cycle that followed.
Notably, other Bitcoin portals have viewed the massive failure of Mt.Gox as positive news.
Since accredited firms are excluded early from the market due to mismanagement and dysfunctions, later entrants learn from their mistakes and build stronger operations in their own operations, which strengthens the cryptocurrency infrastructure overall.
High inflation of countries ’economies and the trend towards Bitcoin:
The case of using Bitcoin as a currency for developing countries that are currently experiencing high inflation is valuable when looking at the volatility of Bitcoin in these economies against the fluctuations of Bitcoin in the US dollar.
Bitcoin is less volatile against the US dollar compared to the hyperinflationary Argentine peso against the US dollar.
However, the cross-border transfer of Bitcoin makes it a very potential borrowing tool for Argentines.
Likewise, financiers outside Argentina could earn a higher return under this scheme than they could by using other debt instruments denominated in their home currency, potentially offsetting some of the exposure risks to the hyperinflationary Argentine market.
Tax treatment raises volatility:
According to the US Internal Revenue Service ( IRS ), Bitcoin is in fact an asset for tax purposes.
This had a mixed effect on bitcoin's volatility.
On one side, we find that any statement recognizing the currency has a positive effect on the market’s assessment of the currency.
Under the new tax law, users are required to record the market value of the currency at the time of each transaction, no matter how small.
This need for record keeping can be slow to adopt as it seems to be a lot of trouble for many users.
The decision to name a currency as a form of property for tax purposes may be a signal to some market participants that the tax authority is preparing to implement stronger laws later.
Too strong currency regulation may cause a currency's adoption rate to slow to the point where it is unable to achieve the mass adoption which is a critical factor for its overall benefit to society.
These were the most prominent potential factors causing the volatility of the Bitcoin currency.