Individuals and businesses now prefer to buy Bitcoin, as it can provide excellent returns. It doesn’t follow the trends of other assets, such as stocks, so cryptocurrency traders no longer have to focus on traditional market sentiment or macroeconomic developments. Bitcoin is decentralized, which means you can trade on a peer-to-peer marketplace in a non-custodial manner with smart contracts that facilitate the exchange of assets. Bitcoin used to be a risky investment with high volatility, so even the best traders in the world couldn’t make any profit. As highlighted by Bitwise Asset Management’s Matt Hougan, the cryptocurrency could soon get rid of its bad reputation as its price movements have decelerated over the past decade.
Bitcoin is difficult, if not impossible, to value because it doesn’t generate cash flow and isn’t backed by any asset. Its value comes from its scarcity – it has a hard cap of 21 million coins, but the actual number might fall short due to the bit-shift operators used in the codebase. Many supporters claim that Bitcoin’s volatility doesn’t lessen its attractiveness; it adds to it. Be that as it may, Bitcoin’s volatility can have negative consequences in terms of widespread adoption, so it must maintain low volatility under the soaring trade volume. It’s made remarkable progress, there’s no denying that, but Bitcoin hasn’t become a price-stable asset.
To Understand Bitcoin’s Price Movements, Let’s Consider the Factors That Influence Its Value
A financial product that seeks to become a global payment system (or even a monetary system) must display low volatility. Since it was first introduced, Bitcoin has had an erratic trading history, being subject to sudden, massive price swings. As the cryptocurrency’s user base has increased and it has become favored in transactions, Bitcoin has become more stable. To be more precise, volatility is in a downward trend. With significant market capitalization, limited supply, and consistent mining requirements, it doesn’t come as a surprise that Bitcoin made it to the top. You can invest in a few easy steps.
The most critical factors for Bitcoin’s volatility are:
- Demand-supply imbalance: The demand or the supply of Bitcoin affects its market price. An influx of buyers drives prices up, while a surge in sellers naturally pushes prices lower. What’s driving the cryptocurrency market right now is the demand from ETFs coupled with an increasingly tight supply. Let’s not forget the Bitcoin halving is just around the corner. Bitcoin recently moved past $71,000.
- Information flows to Google Trends: Google Trends is one of the most robust determinants of Bitcoin volatility, capturing investors’ attention. Unlike Twitter (X) or LexisNexis, Google Trends is freely available and can be used as a reliable measure for online searches. The information exchange between the Bitcoin market and Google Trends is bidirectional, which can be attributed to growing media attention towards cryptocurrency.
- Regulatory impact: Decisions that are made public, from various parts of the globe, trigger immediate and often unpredictable noise, affecting Bitcoin’s value. For example, after the approval of the first-ever spot Bitcoin ETF, lots of people started selling cryptocurrency, so Bitcoin’s price declined by 15%. Analysts at Morgan Stanley say that government support is critical for Bitcoin’s price to accelerate, meaning that it should be regulated further.
Does Bitcoin’s Widespread Adoption Hinge on Its Volatility? Why, Yes!
Bitcoin hasn’t reached mass adoption, and it might take a number of generations to filter into society. Even if the SEC has given spot Bitcoin ETFs the green light, the cryptocurrency must make some efforts to gain widespread acceptance; in other words, it must make some compromises. Bitcoin moves around a lot, and some people find that difficult to understand. While price volatility has been its most characteristic feature, Bitcoin must reach price stability to be accepted in everyday transactions and allow people to make more reliable plans. The experts argue stablecoins are more effective as forms of payment.
The uncertainty surrounding Bitcoin’s value can create issues for businesses that rely on stable prices. On the flip side, the risk of losing money can discourage individuals from using it as a medium of exchange, even if Bitcoin presents opportunities for financial inclusion. Bitcoin’s volatility can have both favorable and unfavorable consequences. The large fluctuations in value make it challenging for businesses and consumers to rely on cryptocurrency for day-to-day transactions, attracting investors who thrive on market fluctuations. There must be a considerable inflow of small users into the system to lower volatility. Increasing exchange volume and on-chain transfers will only increase the volatility of the asset.
One Of Bitcoin’s Prevailing Characteristics Could Be Its Biggest Problem
One of the chief characteristics of Bitcoin is its fixed supply dynamic, which allows for predictable growth. Satoshi Nakamoto conceived Bitcoin to be deflationary, so its value increases with time as supply decreases and demand remains constant. This advantage can become a shortcoming, according to the pros. The cryptocurrency’s algorithm makes the supply of coins predictable but leaves demand to fluctuate, which introduces uncertainty. It isn’t very comforting for the vast array of people who want to become involved in the cryptocurrency space and are willing to divert their resources to such an investment. No one cares about the supply, but everyone cares about price.
According to Vitalik Buterin, Ethereum’s co-founder, stabilizing Bitcoin’s price requires having the supply flexible, which goes against Nakamoto’s original concept. Since Bitcoin’s governance is decentralized, any change to the protocol requires widespread consensus, meaning the majority of the nodes would have to adopt the new rule, which is unlikely. Changing Bitcoin’s 21 million limit requires a hard fork, that is, a radical change to the blockchain network, so all users would have to update their software. Disagreements over the alteration could be intense and lengthy.
Conclusion
Bitcoin is becoming less and less volatile, but it’s got a long way to go before it can achieve price stability. It lacks one of the most crucial properties to become a good store of value because its supply is so rigid and demand is volatile. There needs to be a surge of savvy users in the system performing small trades for volatility to decrease even further.
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