Bitcoin Volatility – Why and How to Plan for It

Bitcoin is the original blockchain and the cryptocurrency market owes its creation to it. Up until March 2017, Bitcoin comprised a dominant 80% of the market. It still makes up over 35% of the market as of May 2018. There has been a sharp decrease since then. However, other cryptocurrencies, such as Ethereum, Ripple, Litecoin, Cardano, Stellar or Neo still tend to follow its price moves, especially in the long term. Price volatility is important for several reasons. Investors want to feel secure about their money. The most influential factors acting on Bitcoin volatility are listed and explained below.

Items Influencing Bitcoin’s Price Volatility

Bitcoin’s price has been volatile throughout its history. The true value of cryptocurrencies is still being determined, which is why it’s important to know the most volatile cryptocurrencies on the market. Many investors classify Bitcoins as a store of value. Investors want to store their value in something they know is stable. There are the inherent reasons for this as opposed to taking higher risk investments. According to Forbes, several factors contribute to volatility in the price of Bitcoin. Fraud, institutional investors, financial planners, valuation, and payment variables make up the most common.

The Bitcoin price volatility shows predictable characteristics. Some of the interest in Bitcoin is owed to declining price fluctuations that began in 2015. Between 2010 and 2015, volatility has been high during the period of December through June. This asymmetrical annual price volatility is an indicator of an immature market even though overall volatility has decreased since 2015.

World Market Index, Trends, and Daily Events

The World Market Index (WMI) can be used to represent the overall state of the market. Having no, or negative, correlation with this index would offer investors risk protection. Thus, Bitcoin offers investors a hedge against market conditions because it does not appear affected by the conventional factors that influence the WMI. Overall, as Bitcoin is accepted, there is a trend is toward decreasing volatility. However, new small-scale trends increase volatility. One of the most long-awaited trends is using cryptocurrencies to buy goods directly.

The Bitcoin Volatility Index is a good place for investors to visit each day to gain a deeper understanding of market reactions to news and press releases. Before 2014, Bitcoin’s price volatility fluctuated up to 10% within a month. From 2016 to May 2018, Bitcoin volatility has ranged from 1% to over 7% in a single day. From mid-December 2017 to March 2018, daily volatility remained above 6%. Investors can expect fluctuations in price around 5%, at least in the near term.

Information Demand and Trade Volume

There is a significant positive correlation between trade volume and information demand. As the demand for information increase so does volatility. Trade volume follows this rise. Information becomes less relevant when investors no longer wish to take additional risk. Information also corresponds with major market events. Since Bitcoin lacks a fundamental value, investors must rely upon supply and demand. This makes information more critical.

Fraud Prevention and Sentiment

One of the most widely recognized dangers in Bitcoin investment is fraud. Not surprisingly, Forbes recognizes fraud as one of the most important factors for price volatility. It affects general sentiment about the cryptocurrency market in general. Thus, even technical investors who are sure about the security of their investments must account for the impact of fraud on price.

The sentiment is a marginal factor in the determination of Bitcoin volatility. As volatility increases so does overall sentiment. In MENDELU Working Papers in Business and Economics No. 58 (2016), researchers from Mendel University in Brno examined Sentiment and Bitcoin Volatility. Their findings support the Garcia et al. (2014) and Kristoufek (2015) studies that the Bitcoin price bubble emerged because of less rational factors. The Mendel study also validates Georgoula et al. (2015) that positive sentiment had the greater influence. The most volatile period preceding the Mendel study was from December 12, 2013, to March 31, 2014. Positive sentiment was shown to be significant for every period that related to excessive volatility except during 2015. While volatility is more complex than sentiment alone, the Mendel University study shows a clear association.

Valuation, Investors, Variable Payments, and Fees

The methods for determining value in a market impact institutional investors and financial planners. They must feel comfortable about staking their reputations. This is quite difficult in a new market with so many unpredictable variables.

Bitcoin payments vary between exchanges and independent trading. Whether overpaying or underpaying, payment variability affects volatility. Bitcoin and exchange fees that are associated with converting to other crypto coins (or fiat currency) can be factored here. A higher volatility also means increased conversion costs and vice-versa. Moreover, this also has a say in the Bitcoin Cash Price prediction as well.

A Broad Perspective

People generally see Bitcoin volatility as a threat. However, speculative investments appear to be giving way to natural supply and demand trends. Volatility matters when attempting a trade, particularly when trying to sell bitcoins while prices are dropping quickly. Not knowing about volatility is detrimental to investing. Over the course of a week, even a 3% daily price change can cause an uneducated investor to reconsider a long position. This is why it is critical to be capable of identifying the influencers of volatility. This further influences the Bitcoin price predictions.

Study the advanced chart below for more info on Bitcoin volatility over time:

Conclusion

This article examined the volatile price of Bitcoin and it looked at the most influential variables. The WMI, trends, information demand, volume, fraud, sentiment, methods for valuation, investors, payment variables, and fees all factor into how Bitcoin’s price fluctuates. Since the market is still new, and there is not a fundamental value associated with Bitcoin itself, specialists expect that the price will remain volatile. However, there is an increasing tendency toward stabilization as the masses adopt the currency. It is becoming accepted as a store of value, and currently, as a hedge against traditional market risks.