Why Is Bitcoin So Volatile and Will It Ever Stabilize?

If you purchased Bitcoin in October 2021, your investment would have nearly halved by February 2022. If you had held through the volatility until October 2022, your Bitcoin would have lost over 70% of its value. Such wild price swings make Bitcoin a risky investment. This blog will help you make sense of the chaos. We’ll explain why Bitcoin is so volatile and examine whether its price will ever stabilize using Bitcoin Indicators. This information can help you make informed decisions about investing in Bitcoin.

Bitcoin analysis is a valuable tool for achieving goals. This resource can help you get a clear picture of why Bitcoin is so volatile and whether it will ever stabilize so you can make informed decisions about your investments.

Why Is Bitcoin So Volatile?

Bitcoin - Why Is Bitcoin So Volatile

Volatility refers to the frequency and magnitude of an asset's price fluctuations. When price changes occur rapidly and significantly, the asset is said to be volatile. Bitcoin, the world's first decentralized digital currency, often makes headlines for its extreme price fluctuations.

Bitcoin Price Swings

Over the last decade-plus, one bitcoin has gone from worth a few cents to reaching an all-time high of over 74,000 dollars. It has also experienced significant drops, losing over 80 percent of its value in some instances.

This volatility has left many investors and analysts wondering why Bitcoin's price is so unstable and what factors contribute to its price swings.

The Nature of Bitcoin Volatility

Bitcoin's inherent volatility stems from a complex interplay of market factors—chief among them being its relatively nascent stage as a financial asset.

Unlike traditional commodities or currencies established for centuries, bitcoin and the broader market lack the historical data and long-term stability that contribute to more predictable price movements.

Scarcity and Volatility

This nascent nature means that Bitcoin is still in a price discovery phase, where the market continuously assesses its actual value, leading to large price swings as new information and developments emerge.

Bitcoin's fixed supply cap of 21 million coins introduces a scarcity factor that can exacerbate price fluctuations as demand ebbs and flows against this unyielding supply limit.

Whales and Market Manipulation

Another factor contributing to Bitcoin's volatility is the influence of large-scale investors, often called whales, who hold substantial amounts of it.

Their market actions can significantly impact supply and demand dynamics—with large buy or sell orders leading to sharp price changes.

Liquidity Issues and Market Infrastructure

The relative immaturity of the market infrastructure can lead to liquidity issues. Compared to more established markets, the capacity to buy or sell large amounts without affecting the market price is limited.

Maturing Market and Volatility

This can result in significant price changes as investors attempt to enter or exit positions. As the market continues to mature, with the introduction of bitcoin-related financial products like spot exchange-traded funds and regulatory landscapes evolving, these factors may change, potentially leading to a decrease in volatility over time.

Until then, bitcoin's price volatility remains a hallmark of its market behavior, presenting both opportunities and risks for investors and traders alike.

5 Reasons Why Bitcoin is Volatile

Bitcoins moving from One Phone to Another - Why Is Bitcoin So Volatile

1. Supply and Demand Dynamics Drive Bitcoin Volatility

Bitcoin’s design is built on a structure of finite supply. Unlike traditional currencies, which central banks can issue indefinitely, Bitcoin has a maximum quantity that will ever exist, set at 21 million. Currently, there are less than 3 million Bitcoins left to be mined.

The idea behind this scarcity is to imitate the limited quantity of precious metals, such as gold. The rare supply of Bitcoin and its demand drive the price volatility. When demand spikes, the limited supply leads to rapid price increases until the market can adjust.

Halving and Scarcity

As new Bitcoins enter circulation, the price may stabilize. However, halving events that occur approximately every four years dramatically change the supply dynamics and can lead to sharp price increases. The most recent halving occurred in April 2024, reducing the block reward from 6.25 Bitcoins to 3.125 Bitcoins.

Halving events reduce the incentives for mining new blocks by half, slowing the rate at which new Bitcoins are released onto the market. This makes Bitcoin more scarce and can lead to rapid price increases as investors react to the new supply dynamics.

2. Market Speculation and Investor Behavior

Speculation is a major driver of Bitcoin’s price volatility. Investors often buy Bitcoin based on expectations of future price increases, leading to significant price swings. An essential factor is investor sentiment, which is shaped by market psychology.

FOMO (fear of missing out) and FUD (fear, uncertainty, doubt) may give rise to irrational trading behaviors. The market is primarily driven by speculation. Unlike traditional assets, Bitcoin does not generate cash flows or dividends, making it difficult to value based on fundamental metrics.

Speculation and Sentiment

As a result, its price is often influenced by speculative trading, where traders buy and sell Bitcoin based on short-term price movements rather than long-term value. Investor sentiment and market psychology are crucial factors in Bitcoin’s price movements.

The market is highly influenced by emotions, with fear and greed driving buying and selling decisions. FOMO can drive prices to new highs during bull markets as investors rush to buy Bitcoin to avoid missing out on potential gains. Conversely, during bear markets, FUD can result in panic selling and substantial price drops.

3. Regulatory News and Developments Create Bitcoin Volatility

Regulatory announcements and government policies profoundly affect Bitcoin’s price. Legal uncertainties and changes in regulatory stance can create significant market volatility. Historical examples include China’s repeated crackdowns on trading and mining, which have led to sharp price declines.

Regulatory announcements can create uncertainty and affect investor confidence, leading to price volatility. For instance, when the U.S. Securities and Exchange Commission (SEC) rejected a proposed Bitcoin ETF in 2018, Bitcoin’s price dropped by over 10% within hours.

Regulation and Uncertainty

Announcements of regulatory crackdowns in major markets like China and South Korea have led to significant price drops. The global regulatory landscape still needs to be more comprehensive and uncertain.

Different countries have adopted varying approaches to regulating Bitcoin, ranging from outright bans to full legalization. This regulatory uncertainty contributes to Bitcoin’s volatility as investors react to news and developments in different jurisdictions.

4. Technological Factors and Security Concerns

Technological updates, such as forks or significant upgrades to the Bitcoin network, can impact its price. The introduction of the SegWit (Segregated Witness) protocol and the Bitcoin Cash fork were pivotal events that influenced market dynamics.

Hacks and Security

The most notable example is the Bitcoin Cash Fork in 2017, which created a new currency to improve transaction speed and scalability. Security breaches and hacks are another critical factor influencing Bitcoin’s price. High-profile incidents, such as the Mt. Gox hack in 2014, have eroded market confidence and led to steep price drops.

Exchange and wallet security must be guaranteed to keep investor confidence. The Mt. Gox breach, which resulted in the loss of roughly 850,000 Bitcoins, is among the most well-known incidents in Bitcoin history. At the time, Mt. Gox, the largest Bitcoin exchange, failed due to a hack that caused its price to drop by more than 50%.

5. External Economic and Market Factors Impact Bitcoin Volatility

Bitcoin often correlates with traditional financial markets and macroeconomic factors. For instance, during economic uncertainty or high inflation, investors may turn to Bitcoin as a hedge, driving its price.

Traditional assets may be more attractive during periods of economic stability. Trends often influence Bitcoin’s price movements in conventional financial markets. For example, investors may seek alternative assets like Bitcoin to hedge against traditional market risks during economic uncertainty or stock market downturns.

Correlation and Diversification

This correlation was particularly evident during the COVID-19 pandemic when Bitcoin’s price surged alongside gold as investors sought safe-haven assets. Bitcoin’s correlation with traditional markets is not always consistent.

At times, Bitcoin has exhibited a low or negative correlation with traditional assets, highlighting its potential as a diversification tool in investment portfolios. Macroeconomic factors can also impact Bitcoin’s price, such as:

Inflation
Interest rates
Geopolitical events

Inflation and Demand

Concerns about rising inflation and currency devaluation have driven demand for Bitcoin as a store of value. Similarly, low interest rates and expansive monetary policies can increase investment in riskier assets like Bitcoin.

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Historical Perspective of Bitcoin Volatility Over Time

BTC/USD chart - Why Is Bitcoin So Volatile

Bitcoin has witnessed rapid price swings since its inception. Extreme volatility is typical of emerging asset classes but can also scare off potential investors.

Let's trace Bitcoin's price history's significant 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.

Bitcoin 1.0 - Early Days (2011-2017)

From 2011 to 2017, Bitcoin was in its proof of technology phase. It was establishing the blockchain as a workable force and was just beginning to have network effects. The volatility was immense; the swings in value were:

Wild
Unpredictable

Yet, those who recognized the underlying promise of this technology and invested in it, even amidst the uncertainty, found themselves on the cusp of a revolution.

Bitcoin 2.0 - Awkward Growth Spurt (2017-2021)

As Bitcoin entered its toddler years, from 2017 to 2021, it began to mature. What was once known to a few tech enthusiasts was now being adopted by millions worldwide and withstanding:

Political bans
Threats

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.

Current Trends in Bitcoin's Market Behavior

Recent market conditions have both stabilized and destabilized Bitcoin's price. Analyzing these trends can provide insights into what drives Bitcoin's volatility and offer some predictive understanding of future movements.

Bitcoin 3.0 - Tests of Adolescence (2021-2024)

The current journey is when technological development continues, and a wider circle of investors values the asset. The beginnings of institutional adoption started to surface, although the expected smaller drawdowns were more significant than anticipated.

Bitcoin's resilience through these tests has been a critical part of its growth story, a phase of toughening up and proving its mettle.

Bitcoin 4.0 - Coming of Age (2024-TBD)

As we approach 2024, we anticipate the advent of Bitcoin 4.0. With potential regulatory clarity and broader acceptance, Bitcoin stands on the brink of its coming-of-age story.

ETF and Acceptance

With the approval of a Bitcoin ETF and other investment vehicles, Bitcoin is expected to transition to a more stable and accepted member of the financial community.

This era may see an influx of retail and institutional investors acknowledging Bitcoin's legitimacy and potential as a cornerstone of modern portfolios.

Will Bitcoin Ever Become Less Volatile?

Bitcoin - Why Is Bitcoin So Volatile

Bitcoin has been around for about 15 years. As with any asset class, the more time it matures, the less volatile it should get. And sure enough, the more Bitcoin has grown up, the less volatile it has become.

The chart shows that Bitcoin’s volatility is trending downward as its market cap and liquidity have increased.

Why Is Bitcoin So Volatile? Another Answer Lies with Market Psychology

Of course, beyond Bitcoin’s size, we must also consider the human behavior driving its price movements, including the role of:

Sentiment
Psychology

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.

Challenges in Predicting Bitcoin's Volatility

Person Holding a Bitcoin - Why Is Bitcoin So Volatile

Bitcoin's market is unpredictable, influenced by various factors that can change rapidly and swing prices. These factors include:

Regulatory uncertainty
Investor sentiment
External macroeconomic events

The very nature of Bitcoin's market is enigmatic, characterized by rapid shifts that often seem detached from the traditional market indicators used in other asset classes. Analysts and investors alike grapple with an array of sophisticated models and analytical tools to predict its next move, but the accuracy of such forecasts is still being determined.

Infancy and Sentiment

One of the primary challenges is the market's relative infancy. Unlike stocks and commodities, which have decades or even centuries of historical data to draw upon, Bitcoin has just over a decade.

The limited historical context makes applying time-tested models based on long-term data easier. Bitcoin operates within a highly sentiment-driven market. The sentiment is influenced by diverse factors, ranging from geopolitical developments and regulatory changes to technological advancements and market manipulation.

Decentralization and Algorithms

Each of these factors can have a disproportionate impact on price movement. Adding to the complexity is Bitcoin's decentralized nature. With no central authority or governing body, market movements are often the result of decentralized actions by individuals across the globe, making collective mood and behavior challenging to gauge.

Algorithmic trading, which uses complex models to predict price movements and execute trades quickly, has added to the volatility. Bots can act on triggers too subtle for human analysts to detect or on pre-emptive strategies designed to capitalize on anticipated market movements, thus potentially leading to self-fulfilling prophecies.

Institutional Influence and Complexity

The influx of institutional investors, each with their strategies and thresholds for buying and selling, further complicates prediction models. These entities can move the market significantly, and their actions are often based on a mixture of proprietary signals and broader economic indicators, which are not always transparent or predictable.

In this dynamic and uncertain landscape, even the most advanced predictive analytics must contend with the reality that a complex web of influences Bitcoin's market:

Unpredictable human behaviors
Emerging technologies
Global events

Adaptability and Uncertainty

The result is an environment where certainty is scarce, and the ability to adapt to rapid change is among the most valuable skills.

Bitcoin Market Dynamics

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How Can Bitcoin Be a Good Store of Value if Its Price Is So Volatile?

Bitcoin Chart - Why Is Bitcoin So Volatile

Bitcoin has high volatility, but it is also quickly proving itself a store of value that may help people protect their wealth from:

Inflation
Economic uncertainty

The more people adopt Bitcoin with the intention of holding it long-term to mitigate future financial crises, the more its volatility should decline.

What Does Store of Value Mean?

A store of value is any object that retains purchasing power into the future and can be readily exchanged for something else. In other words:

A store of value should be worth the same or more over time.
A store of value must be exchangeable with something else (like gold or dollars).

This creates some constraints on good stores of value. A good store of value should not have a very short lifespan, like flowers or milk. It should also be liquid, which measures how easy or difficult it is to exchange.

Liquidity and Scarcity

It’s much easier and faster to exchange a gold bar for money than to trade a cash house. Put another way, gold is more liquid than real estate. If no one will exchange your store of value for something else of value, then your store of value is effectively worthless.

Stores of value should be relatively rare and easy to obtain. Air is vitally important, yet its abundance makes it worthless as a store of value.

The Store of Value Argument for Bitcoin

There is no denying Bitcoin's newness, but that newness can also be considered a strength. Fourteen years ago, the first smartphone (iPhone) was released. A mere 14 years later, smartphones are ubiquitous around the world.

Smartphones allow people to do old things (browsing the Internet, taking pictures, communicating) in new, better ways. Bitcoin is doing that for money and finance.

Volatility and Performance

Like many new and disruptive things, Bitcoin is volatile, but if you zoom out, it has only gone up massively. Indeed, it is the best-performing liquid asset in the last decade.

Critics of Bitcoin point out that it is artificially scarce, so it is worthless. Yet plenty of stores of value are artificially scarce—even fiat currency, one of the primary stores of value!

Scarcity and Control

Governments can always print more and often do, but they don’t generally do so because they want the currency to be relatively scarce.

Yet, while central banks can reduce the scarcity of fiat currencies at will, Bitcoin’s scarcity is set in stone. There are only 21 million possible Bitcoins, and a not insignificant portion of that is lost forever.

Liquidity and Decentralization

Bitcoin is a reasonably liquid asset, and its liquidity is improving by huge percentages yearly. It is already much easier to transact with than gold, though less easy than fiat currency.

Every year, more businesses start accepting Bitcoin as a viable payment method, which means Bitcoin is developing more excellent utility. It is currently used for international remittance and has recently been accepted by some governments as legal tender.

Decentralization and Security

Another important factor contributing to Bitcoin's potential as a store of value derives from its decentralized and purely digital nature. Because Bitcoin is simultaneously everywhere and nowhere, it's difficult to seize or steal, yet it's trivially easy to take with you.

This empowers people to store value independently of third parties, whether banks or nation-states and eliminates the associated third-party risks. People who store fiat in banks run the risk that the bank will default or otherwise restrict access to their funds.

Portability and Accessibility

The same goes for certificates representing gold held in a centralized vault. While it's true that all of the stores of value discussed in this article can also be stored independently from third parties, the fact that they are physical objects makes storing and moving them inherently more complex than Bitcoin.

While the other stores of value require heavy-duty security and are risky or costly to move, Bitcoin, whether it be $100 worth or $100 million dollars worth, can be stored and accessed with little more than a memorized password (and with shared wallets, the single point of failure risk can be mitigated).

Bitcoin as a Store of Value: Digital Gold

Many consider Bitcoin digital gold, offering the benefits of both a digital currency and a precious metal. While it is a far newer store of value, it meets all the requirements of a store of value.

Here’s a quick overview of Bitcoin as a store of value:

Widely accepted: Bitcoin is widely used globally, especially in Australia, the USA, Africa, and Europe.
Durable over time: Bitcoin is a much younger asset than other stores of value, but it has proven itself to be a successful store of value over its 12-plus-year history.
Liquid: You can buy and sell bitcoin 24/7, 365 days a year. There is an incredibly liquid market for bitcoin, with the world’s largest financial institutions trading it daily.
Scarce: With a limit of only 21 million coins, bitcoin is the most scarce of all the stores of values we’ve listed here.
Divisible: Every bitcoin can be divided into 100 million satoshis, making it easy to pay for everyday transactions like a cup of coffee when used with the Lightning Network.
Portable: You can take Bitcoin with you anywhere in the world. As you can custody the coins for yourself, you don’t need to rely on any banking or payment networks to access them.

Bitcoin certainly shares most of the features of a store of value like gold. The number of units is finite; the network is decentralized enough to offer security to holders and can be used to hold and transfer value.

The Best Strategies To Benefit From Bitcoin Volatility

Bitcoin Trading - Why Is Bitcoin So Volatile

Historically, Bitcoin has been a volatile asset. It continues to evolve along with the factors that influence its price, namely:

Supply and demand
Market sentiment
Regulatory changes
Media hype

The volatility of Bitcoin depends upon how much its price fluctuates compared to the average price in a period of time. It’s the standard deviation of Bitcoin’s price.

Opportunity and Risk

Digital currency market volatility presents investors with opportunities and risks, so it’s paramount to understand the forces behind Bitcoin price fluctuations to make sound investment decisions.

HODLing: Stop Selling and Leave Your Investment Alone

The HODLing strategy can help you avoid losses from short-term volatility and gain returns from long-term value appreciation. You purchase Bitcoin and hold it for a long time, ignoring price swings and waiting for the market price of Bitcoin to increase compared to its purchase value.

HODl stands for Hold on for Dear Life. If you’re a beginner, you’re not well-equipped to capture market volatility and trade Bitcoin profitably, so you’re better off investing for the long term. The

HODLing and Risks

The HODLing strategy is similar to the buy-and-hold investing strategy used for stocks. Instead of trading Bitcoin based on market timing, you hold onto it despite market fluctuations.

HODLing isn’t without risks. More precisely, Bitcoin and blockchain technology might not be the revolutionary innovation everyone hopes for. Equally, there are times when it’s best to sell Bitcoin, such as when you’ve gained a substantial amount.

HODLing and DCA

If Bitcoin has doubled from its initial price, this may be an opportunity to sell. Although it may sound simple, HODLing is complicated.

To effectively HODL, you must grasp the importance of dollar-cost averaging, which involves investing the same amount of money at regular intervals. You’ll be purchasing Bitcoin during market ups and downs.

Risk Management in Bitcoin Trading: Don’t Invest More Than You Can Afford to Lose

Losing streaks are inevitable in Bitcoin trading, even if you leverage technical analysis to identify trends and signals. If you invest more money than you can afford to lose, you’ll be pressured to sell your Bitcoin due to panic or liquidity issues.

Risk Management and Investment

Before you start the investment journey, invest only the money you’re willing to lose so that you can focus on your long-term goals and avoid making impulsive decisions. If you invest every dime you have, you’ll lose every dime you have.

As opposed to a savings account, where your money is backed by deposit insurance, the value of Bitcoin is left to the whim of the market.

Create a Bitcoin Savings Plan

One of the best ways to overcome Bitcoin volatility is to avoid it altogether by staying invested and not paying attention to short-term market fluctuations. If you control essential things, such as how much you save, you can balance this volatility with long-term growth.

Choose a predetermined savings amount regularly, buy Bitcoin during bull runs, and stack even more when it’s for sale.

Savings and Lending

A savings account is the best place to deposit your Bitcoin, offering safety and a consistent rate of return. You not only get paid interest on your deposit, but you can also withdraw your funds anytime.

If you agree to lend out your Bitcoin, you can earn interest by depositing your tokens on a blockchain platform. Bitcoin savings accounts offer more favorable interest rates if you lock up your Bitcoin for a while.

Exchanges and Rates

There are plenty of options to choose from, including well-established exchanges. The interest rate offered will depend on market conditions and be paid out in Bitcoin.

Keep Calm and Avoid Irrationality

Knowing how to control your emotions can be essential while trading Bitcoin. It means the difference between success and failure. Your mental state can:

Affect your investment decisions
So slow your breathing
Avoid panic attacks
Recognize irrationality

Due to fear of missing out on possible gains, you might feel pressured to make investments – in other words, you’re tempted to buy and sell impulsively.

Greed and Plan

Greed can also influence your decisions: you become committed to your Bitcoin holdings and refuse to sell, even if the time is right. You can’t solve my irrational behaviors without a trading plan.

Save 30% on Bitcoin Magazine Pro's Bitcoin Analysis Tool With Our Annual Plan

Bitcoin Magazine Pro is a comprehensive Bitcoin analytics platform that provides investors with a wide range of free, regularly updated Bitcoin charts, each with detailed explanations to make complex information accessible. For those looking to dive more deeply, paid tiers offer features like:

Chart alerts
Exclusive indicators
In-depth market reports

Why Is Bitcoin So Volatile and Will It Ever Stabilize?

6 de octubre de 2024