What makes Bitcoin so unstable?

Traders are always concerned about ‘Bitcoin volatility’. It is important to know what makes the value of this particular digital currency very volatile. Like many other things, the value of ‘Bitcoin’ also depends on the rules of supply and demand. If the demand for ‘Bitcoin’ increases, then the price will also increase. On the contrary, reducing the demand for ‘Bitcoin’ will lead to a decrease in demand. In simple words, we can say that the price is determined by the amount that the trading market has agreed to pay. If a large number of people want to buy ‘Bitcoin’s, then the price will go up. If more people want to sell ‘Bitcoin’s, then the price will drop.

It is worth knowing that the value of ‘Bitcoin’ can be variable compared to more established commodities and currencies. This fact can be attributed to its relatively small market size, which means that a smaller amount of money can significantly change the price of ‘Bitcoin’. This inconsistency will naturally diminish over time as the currency evolves and market size grows.

After being teased at the end of 2016, ‘Bitcoin’ reached a new record high in the first week of this year. There may be several factors that cause the instability of ‘Bitcoin’. Some of them are discussed here.

Bad printing factor

Users of ‘Bitcoin’ are mostly intimidated by various news, including statements by government officials and geopolitical events that ‘Bitcoin’ can be regulated. This means that the adoption rate of ‘Bitcoin’ is hampered by negative or bad reports in the press. Various bad news has caused fear among investors and banned them from investing in this digital currency. An example of the bad news is the eminent use of ‘Bitcoin’ in processing drug transactions via Silk Road which ended with the FBI stopping the market in October 2013. This type of story caused panic among people and caused ‘Bitcoin’ value to decrease significantly. On the other hand, veterans in the trading industry saw such negative incidents as proof that the ‘Bitcoin’ industry is maturing. That is how ‘Bitcoin’ started to gain its value soon after the effect of bad printing disappeared.

Fluctuations in perceived value

Another big reason for the value of ‘Bitcoin’ to become variable is the fluctuation of the perceived value of ‘Bitcoin’. You may know that this digital currency has properties similar to gold. This is driven by the design decision of the creators of the basic technology to limit its production to a static amount, 21 million BTC. Due to this factor, investors can allocate more or less funds to ‘Bitcoin’.

Security breach news

Various news agencies and digital media play an important role in building a negative or positive public concept. If you see that something is being advertised favorably, you will probably go for it without paying much attention to the negative sides. There was news of a ‘Bitcoin’ security breach and this really made investors think twice before investing their hard earned money in ‘Bitcoin’ trading. They become too susceptible to choosing any specific ‘Bitcoin’ investment platform. ‘Bitcoin’ can become changeable when the ‘Bitcoin’ community discovers a vulnerability to security in an effort to create a great open source response in the form of security fixes. Such security issues give rise to several open source software such as Linux. It is therefore advisable for ‘Bitcoin’ developers to expose security vulnerabilities to the general public in order to make powerful solutions.

The latest ‘OpenSSL’ vulnerabilities attacked by ‘Heartbleed’ by mistake, reported by Neel Mehta (a member of Google’s security team) on 1 April 2014, appear to have had a declining effect on the value of ‘Bitcoin’. According to some reports, the value of ‘Bitcoin’ fell to 10% next month against the US dollar.

Small value option for owners of large ‘Bitcoin’ proportions

The variability of ‘Bitcoin’ also depends on the fact that the owners of ‘Bitcoin’ have large shares of this digital currency. It is not clear for ‘Bitcoin’ investors (with a current stake of over $ 10 million) to address a position that is expanding into a fiat position without serious market shifts. Thus, ‘Bitcoin’ has not touched on mass market adoption rates that would be important to give value to the option to large ‘Bitcoin’ owners.

The effects of Mt Gox

The recent major damage to ‘Mt Gox’ is another big reason for the volatility of ‘Bitcoin’. All these losses and the resulting news of large losses had a double effect on instability. You may not have known that this reduced the overall rate of ‘Bitcoin’ by almost 5%. This has also created a potential increase in the residual value of ‘Bitcoin’ due to increased scarcity. However, the replacement of this lift was a negative outcome of the series of news that followed. In particular, many other ‘Bitcoin’ applicants saw a major failure at Mt Gox as an optimistic thing for the long-term prospects of ‘Bitcoin’.