Causes of Volatility in Bitcoin's Value
Bitcoin, the pioneering digital currency, has captured the attention of investors worldwide, with its potential for portfolio diversification, early retirement goals, and hedge against inflation. However, its price remains volatile, a result of a multitude of factors that continue to shape its evolving role as both a speculative asset and a pioneering financial technology.
Despite the volatility, the potential for regulation and improvement has been recognised by a growing number of individuals. In fact, Bitcoin's price reached an all-time high of over $44,000 USD as of February 2021.
The price fluctuations of Bitcoin are influenced by several key factors. Market demand and supply scarcity play a significant role, as Bitcoin has a fixed supply capped at 21 million coins. When demand rises but supply remains limited, the price climbs, and vice versa.
Profit-taking and investor psychology also contribute to Bitcoin's volatility. When many investors hold Bitcoin at substantial profits, they tend to sell to lock in gains, creating natural selling pressure and volatility.
Macroeconomic and Federal Reserve policies, regulatory developments, and news, correlation with traditional financial markets, technical limitations and network issues, market structure and trading activity, all contribute to the price volatility of Bitcoin.
Meanwhile, DeFi (Decentralized Finance) is gaining momentum as a potential revolutionary way to handle financial transactions without relying on traditional banks or institutions. However, some people see DeFi as the inevitable future of finance, while others remain skeptical about its scalability and security.
Despite Bitcoin's popularity, it has not yet achieved stability as a form of currency due to its limited global recognition. Real-world assets have continued to hold their ground or thrive amid cryptocurrency challenges.
The lessening of unethical practices such as wash trading may indicate a potential for Bitcoin regulation in the near future, offering hope for lower price fluctuations. This reduction in wash trading activities was observed in 2019, and many people who were initially doubtful about Bitcoin's future have been convinced of its potential for improvement.
Bitcoin is primarily used for online buying and payment of services, and it is not regulated by central banks or governments, leading to price fluctuations influenced by supply and demand of cryptocurrencies. It is mainly circulated online within the United States, and its use is banned in at least one country.
If this trend continues, Bitcoin may become accepted globally as an alternative currency. However, the future of Bitcoin and DeFi remains uncertain, with their continued growth and acceptance dependent on regulatory developments, technological improvements, and investor behaviour.
Investors recognize the potential for regulation and improvement in Bitcoin, considering its price reached an all-time high of over $44,000 USD as of February 2021. In the realm of finance, Bitcoin's volatility is influenced by factors such as market demand, investor psychology, and macroeconomic policies, making it a suitable target for investing.
