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2021 was in many ways the year of Bitcoin. El Salvador became the first country to adopt Bitcoin as its official currency, the first-ever BTC ETF was launched, and BTC hit its all-time high of $68,000.
2022, on the other hand, has been anything but pleasant for the world’s biggest cryptocurrency as BTC fell below $48,000 and touched $40,000 at one point during the 1st week of the new year.
This might cause crypto and non-crypto investors alike to wonder why Bitcoin is so volatile in its highs and lows. Well, there’s no simple answer to this question but there are multiple factors known to affect Bitcoin.
Bitcoin is still in its infancy or what’s known as the price discovery stage. Some degree of volatility is thus expected but even then, there are other factors that add to the wild price swings of BTC.
Supply and demand is the name of the game when it comes to a scarce asset. Bitcoin is one of the most coveted yet limited assets by design - there can only ever exist 21 million BTC.
This is why BTC isn’t alien to the impact of supply and demand. As time passes by, we’re inching closer to the final blocks of BTC being mined and as a result, more investors may want to get in on the action.
If there’s more demand than supply, the value of BTC gains a healthy boost as is evident from its 13-year history. There’s also another factor that latches on to the supply and demand principle, as you’ll see next.
You’re more or less aware that there are thousands of people who’ve invested in Bitcoin. But what most people don’t know is that approximately 1000 investors own close to 40% of all Bitcoin.
These investors or Bitcoin Whales as they are referred to have been known to add to the volatility of BTC. But there are caveats in place to tackle mass sell-offs by Whales who own millions worth of BTC.
Most exchanges only allow $50,000 worth of liquidation every day, a rule that can minimize the impact of mass liquidation by both large and medium ticket size BTC investors.
Like most cryptocurrencies, Bitcoin is speculative and nothing adds more fuel to speculation than news or opinion pieces that are presented as news.
A certain expert who has a vested interest in the success of BTC may predict that the crypto may be worth millions of dollars soon while BTC sceptics might opine in the opposite direction.
Either way, ill-informed readers may fall victim to these news pieces and in turn, buy or sell BTC in droves purely because an expert is saying so. These news cycles are known to influence the price of Bitcoin.
Bitcoin can be made obsolete if governments choose to do so, China being the most recent example. But most governments aren’t looking to do that and are looking at ways to legitimize Bitcoin and crypto.
That’s why the regulatory action that governments introduce can impact the price of BTC. For example, El Salvador made BTC its official currency. There was a sharp spike in the price of BTC soon after.
Bitcoin buyers and sellers are knowingly or unknowingly working out the price of BTC through trades in what is known as the price discovery stage. This is common for most assets in their infancy.
This is one of the most prominent factors for the volatility of Bitcoin because it’s not as old as other established assets like the USD or stocks like Consolidated Edison that have been around for decades.
The new year was muted for many people across the world because of the new covid variant known as Omicron. It seemingly had a negative impact on the stock market and crypto market.
Furthermore, the minutes of the recent US Federal meeting compounded the woes that BTC experienced. Turns out, the US government is looking to reduce its support to lift up the economy.
Beyond these two reasons, comments from prominent celebrities like Elon Musk haven’t helped Bitcoin’s case either. The billionaire recently said that Dogecoin is a better alternative to BTC for transactions.
All things considered, volatility is but a feature and not a bug of any tradable asset, especially if you’re a long term investor who’s banking on the future use cases of Bitcoin.
Note: Facts & figures are true as of 12-01-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in unregulated assets like cryptocurrency.
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