VOLATILITY AND BITCOIN EXPLAINED

Volatility 

Volatility measures how much the prices of assets, such as stocks, commodities, bonds, or currencies fluctuate over time in financial markets.

It can be calculated using different methods, such as standard deviation, beta, the variance of returns, or the implied volatility derived from option prices. These measures compare the returns of bitcoin to a benchmark or the market as a whole.

Volatility is often used as an indicator of risk. Higher volatility implies more uncertainty and unpredicatbility about the future value of an asset.

Volatility can also affect the behaviour of investors and traders. It can create opportunities for profit or loss, depending on their risk appetite and market sentiment.

Factors such as supply and demand, economic and political events, news and information, investor psychology, and market liquidity can influence volatility.

Bitcoin has been gaining popularity as an alternative asset class. However, it also exhibits high levels of volatility, which means that its price fluctuates significantly over time.

So what are the factors that influence the volatility of bitcoin?

• Volatility And Bitcoin
• A Closer Look At Regulation

Volatility And Bitcoin

A high volatility means that bitcoin’s price can change significantly in a short period of time, either upwards or downwards, creating opportunities and risks for investors and traders.

There are several factors that contribute to bitcoin’s volatility:

Supply and demand
Bitcoin has a fixed supply of 21 million coins. This makes bitcoin scarce. Scarcity increases the demand for bitcoin, as people perceive it as a valuable asset that cannot be diluted or debased.

However, the demand for bitcoin is also influenced by various factors, such as adoption, innovation, regulation, media attention, and investor sentiment. When the demand for bitcoin exceeds or falls short of the supply, the price adjusts accordingly. Sometimes in dramatic ways.

Speculation
Bitcoin is still a nascent asset class. Which means that it is in the process of discovering its true value and potential.

Many investors and traders buy and sell bitcoin based on their expectations of future price movements, rather than its intrinsic value or utility. This creates a speculative market, where prices are driven by emotions, rumours, and hype, rather than fundamentals.

Speculation can amplify both the upward and downward trends of bitcoin. Leading to bubbles and crashes.

Leverage
Bitcoin is also traded on platforms that offer leverage. Which means that traders can borrow money to increase their exposure to the market.

Leverage can magnify the profits or losses of traders, depending on the direction of the price movement. However, leverage also increases the risk of liquidation. Which means that traders can lose their entire position if the price moves against them by a certain margin.

When the market is volatile, liquidations can trigger a cascade of sell orders, pushing the price down further, or vice versa.

Technology
Bitcoin is powered by a complex and innovative technology, which is constantly evolving and improving.

However, this also means that bitcoin is vulnerable to technical issues, such as bugs, hacks, forks, and network congestion.

These issues can affect the security, functionality, and scalability of bitcoin, and thus impact its price.

For example, in 2017, a software upgrade called SegWit2x was proposed to increase the block size of bitcoin. However, it failed to gain consensus among the community, leading to a split of the network and the creation of a new coin called Bitcoin Cash. This caused confusion and uncertainty among investors, resulting in a sharp drop in bitcoin’s price.

Regulation
Bitcoin is also subject to the rules and regulations of different countries and jurisdictions. This can affect its legality, accessibility, and taxation.

Regulation can have both positive and negative effects on bitcoin’s price, depending on how it is perceived by the market.

For example, in 2013, China banned financial institutions from dealing with bitcoin, causing a major sell-off and a plunge in bitcoin’s price.

On the other hand, in 2020, the Office of the Comptroller of the Currency (OCC) in the US granted permission for banks to provide custody services for cryptocurrencies. This boosted the adoption and legitimacy of bitcoin, and lifted its price.

A Closer Look At Regulation

Regulation can vary and change over time and across different countries and jurisdictions. This creates more complexity and diversity for the regulation of bitcoin.

Regulation can provide clarity and legitimacy for bitcoin
When governments or authorities issue clear and consistent rules and guidelines for the use, taxation, and trading of bitcoin, they can reduce the uncertainty and ambiguity that surround the cryptocurrency.

This can increase the confidence and trust of the market participants. It will attract more adoption and investment from institutional and retail investors.

Regulation can impose restrictions and barriers for bitcoin
When governments or authorities ban, limit, or penalize the use, taxation, and trading of bitcoin, they can increase the difficulty and cost of accessing and transacting with the cryptocurrency.

This can decrease the demand and liquidity of the market participants, as well as deter or force out some adoption and investment from institutional and retail investors.

Regulation can create speculation and anticipation for bitcoin
When governments or authorities signal, propose, or debate potential rules and guidelines for the use, taxation, and trading of bitcoin, they can create expectations and reactions from the market participants, who may try to anticipate or speculate on the future outcomes and implications of the regulatory actions or announcements.

This can increase the volatility and sensitivity of the market participants. It will trigger more trading and speculation from institutional and retail investors.

These are some of the main factors that explain why bitcoin is volatile, but they are not the only ones. Bitcoin is also influenced by other external events, such as global crises, political developments, environmental concerns, and social movements, that can affect the demand and supply of money and assets in general.

In short, bitcoin is not yet a stable or predictable store of value, but rather a dynamic and evolving one, that may offer opportunities and risks for its users and investors.