March 12th, 2018
The price fluctuations of Bitcoin are one of the main interests and concerns of people wanting to jump on the Bitcoin Bandwagon. Experts believe that many factors drive the constant “up” and “down” prices of Bitcoin. The volatility of Bitcoin is measured in traditional markets by a Volatility Index called the CBOE Volatility Index. Bitcoin volatility doesn’t have an accepted index yet, as it is just in its beginning stages. But it is widely known that Bitcoin is capable of much more volatility when compared to the US dollar and in just a very short amount of time (ten years). Some of the important factors that may be causing Bitcoin volatility, include, but are not limited to the following:
Certain news events can scare digital currency users around the globe, this includes different government statements and geopolitical events. More often than not, such negative news events can create fear in investors. Headline-making news from the world of digital currency creates a sense of confusion and distrust among investors. An example of this includes the theft of bitcoins from Mt. Gox in early 2014. Frequent stories of drug dealers using Bitcoin and Bitcoin software hacking stories often make the headlines. These incidents drive public panic and the value of digital currency declines rapidly.
Another reason that may cause the price of Bitcoin to fluctuate is its perceived store of value against the fiat currency. Bitcoin has similar properties to that of gold-except that it doesn’t exist in the physical sense of the word. The Bitcoin number is capped at 21 million units, completely different than fiat currency. Fiat currency is managed by governments who want maintain high employment, low inflation, and satisfactory growth through capital resources investments.
The value of Bitcoin can become volatile when the Bitcoin community exposes security vulnerabilities in an effort to produce huge amounts of open source responses in the form of security fixes. It is important that Bitcoin developers reveal security concerns to the public in order to produce robust solutions. When the news of a Bitcoin bankruptcy, theft or a hacking comes to light-investors react. After these incidents occur, investors begin to lose faith in the Bitcoin system.
The recent announcement made by the IRS that Bitcoin is an asset for tax purposes has gotten a mixed response from the public. As an advantage, any statement recognizing a digital currency leaves a positive effect on the overall market value. However, this decision by the IRS is receiving some pushback as well. The first issue is the complexity for users to have to record the market value of Bitcoin at the time the transaction takes place-every single time. This decisions may also causes some participants and authorities to enforce strong regulations on Bitcoin in the future. The recent IRS statement has not been made very clear to the Bitcoin community, so individuals may have mixed reactions to the Bitcoin market as of late.
Using Bitcoin as currency in many developing countries that are alreading experience high inflation is an important factor to take into consideration when discussing the volatility of Bitcoin in these nations, compared to the volatility of Bitcoin versus the US dollar. Compared to the US dollar, Bitcoin is much more volatile than the highly inflated Argentine currency, the Peso.
Bitcoin has presented the world with a variety of opportunities that didn’t exist prior to its development. Even though this digital currency has yet to convert investors as a possibility for an alternative exchange, it’s still an important piece of the future’s currency. Since the IRS has deemed this currency taxable, many investors see that Bitcoin could actually become a much larger player than they had anticipated. In the future, it seems that much of Bitcoin’s volatility will be driven by investor perception of Bitcoin’s ability to safeguard individual holdings and to be able to provide a reliable store of value as the acceptance for Bitcoin increases.