Why Does Bitcoin Price Change So Much Day by Day?
If you have seen Bitcoin on the news, it is likely that its price has gone up or down. Since its inception, its prices have been quite volatile and now make multiple thousands of dollars changes on a regular basis. What is going on to make its price go up (or down) with the market, and why is it happening?
Something small
*. Technology: The supply of bitcoin is programmed to increase very slowly, no matter how many people want it. This means that the price of Bitcoin is almost entirely dependent on demand.
*. Uncertainty: Cryptocurrencies in general are very new, so expectations about their future value are constantly rising and falling.
*. Policy: Countries cannot directly regulate cryptocurrency transfers, but it can make it more difficult to obtain them.
*. Market Size and Distribution: The market is relatively small, and participants tend to be quite responsive to changes.
*. Whales: Bitcoin “Whales,” or people who hold large amounts of coins, can manipulate the market by buying or selling large amounts.
*. Other cryptocurrencies: Many of the newer cryptocurrencies are often only bought with Bitcoin, so if they become popular, the demand for Bitcoin will skyrocket.
This is not an exhaustive list. As with any economy, there are many factors that influence prices, but these factors explain the majority of Bitcoin price changes. None of these fatal flaws are necessarily in technology. Blockchains are very secure and have a lot of potential applications, but anyone interested in exploring cryptocurrencies should know why value changes so much.
Technology: The display changes slowly
As of April 2018, approximately 12.5 new Bitcoins are being created every ten minutes, which works out to about 1,800 per day. That’s a lot, but with seventeen million BTC currently in circulation, the supply is only changing about 0.01% per day.
Bitcoin is only worth money because people are willing to pay for it. Since supply does not respond to demand here, anyone who wants to buy it will have to pay enough money for the current owner to want to sell it. On the other hand, if a lot of people want to sell, the owners will have to lower their prices until someone buys it. In short: Bitcoin price is almost 100% determined by demand.
Uncertainty: Brave New World or Brave New Bubble?
Cryptocurrencies and blockchains are like any other new technology, from railways to computers: there is a lot of innovation and excitement, but also a lot of failed experiments and mismanagement. No one knows exactly how it will turn out, so investors and early adopters are very sensitive to both positive and negative developments that could affect Bitcoin’s future value.
Politics and regulation
Bitcoin and other cryptocurrencies are also very sensitive to political changes. Governments cannot directly control Bitcoin, but they can control how easily their currencies can be exchanged for it. Both China and South Korea have caused significant market declines by displaying negativity towards cryptocurrencies. If a country heavily involved in the market suddenly exits, the price adjustment will be dramatic.
The market is small, focused and responsive
Anyone using Bitcoin right now is an early adopter, and there aren’t as many of them as you might think. As of April 2018, there are only fifteen million Bitcoin addresses containing more than one US dollar, and of those, the top 1,000 addresses control about thirty-five percent of all Bitcoin in existence.
Additionally, since the people who currently hold Bitcoin tend to be the ones who care about it the most, they react quickly to new developments, and some people who react in a certain way can clear up chain reactions.
Whales can affect
The code behind Bitcoin is designed to ensure that no central authority controls it, which is one of its most attractive characteristics. However, this does not mean that the market is immune to manipulation. “Whales,” or holders of bitcoin who own vast amounts of the currency, can often influence prices by buying or selling in large quantities.
Other cryptocurrencies that create demand
It’s easy to get Bitcoin no matter what currency you want to trade in – dollars, yen, lira, etc. Many of the newer cryptocurrencies can only be purchased with other cryptocurrencies, and since Bitcoin is one of the most traded so anyone who wants to buy Monero can use it, for example, first buying Bitcoin (or Ethereum or Litecoin) to trade it. This means that the more new cryptocurrencies there are, the greater the demand for bitcoins to trade in and vice versa.
Solution?
The underlying technology of bitcoin will continue to evolve and improve, but in the long run, it will only stabilize as soon as the market around it wants it. Once investors get a better understanding of the technology’s potential, governments have a more defined regulatory stance, adoption becomes widespread enough that bitcoin is evenly distributed, and prices are likely to stabilize. Until then, invest only if you do your own research and have a good understanding about what you’re doing. Then you can sit back and enjoy the show!