Any investor who cares about improving their investment portfolio is aware of Bitcoin’s existence and takes a closer look at it. Potential investors are trying to take a closer look at Bitcoin’s historical price fluctuations to assess the degree of risk of investing in it. Because Bitcoin, its underlying technology, and everything associated with it aren’t easy to understand, many investors try to avoid buying Bitcoin.
Hi everyone, this is Alex! I’ve been studying Bitcoin for six years now, and more than once, I’ve come across significant fluctuations in Bitcoin. Let’s break down all the parameters of why the price of Bitcoin fluctuates so much and how to take advantage of it to make a profit.
What the Bitcoin Price Depends On
Every Bitcoin price fluctuation is a whole story, reflected in its two sides: supply and demand. In Bitcoin, the supply side is represented quite clearly: the collection of Bitcoin coins is limited to 21 million, a kind of measure to minimize price fluctuations. The number of coins on the market and the rate at which they are released are also known, while it is harder to determine how many coins are lost forever due to the loss of private keys.
As for understanding demand, it’s a little more complicated. The market is what makes the price of Bitcoin fluctuate so much. Here are some of the factors that affect demand and, therefore, the price of Bitcoin:
- the Bitcoin’s acceptance (acceptance, popularity);
- the expansion of ways to use Bitcoin;
- the market speculation in Bitcoin;
- a relatively small market where small players can tip the scales;
- lack of regulatory restrictions.
Thus, Bitcoin’s price fluctuations cannot always be placed next to those of regular currencies because Bitcoin is not tied to interest rates as a currency in banks; its inflation/deflation is ghostly; and its purchasing power depends on the demand for it (demand function), while the coin has no affiliation with any national economy.
Bitcoin acceptance is a key indicator to explain the demand for Bitcoins and, therefore, the Bitcoin price fluctuations. The rise in acceptance, in this case, also means an increase in the number of people using Bitcoin for their everyday transactions.
Many buy Bitcoin as a means of saving and do not use it as currency. These people are Bitcoin enthusiasts, but they use it to hedge their funds.
The third class of Bitcoin followers is speculators who do not care about hedging or consumption. The only thing they are interested in is the benefits of trading Bitcoin in terms of fiat money. The lack of regulatory restrictions and the small size of the market allow speculators to use the Bitcoin price to their advantage.
Bitcoin Market Correction
Various concepts refer to the current situation in the cryptocurrency market, and a market correction is one of them. One can often see that instead of a correction, one speaks about a fall or collapse of the market, but at this stage, such judgments can be significantly considered exaggerated.
More specifically, a correction means a change in the value of a given asset in the direction opposite to the trend. That is if we have seen a clear upward trend in the cryptocurrency market not so long ago, and then Bitcoin and other leading cryptocurrencies fall back, we are dealing with a market correction.
In traditional markets with low volatility, a correction above 15% can rightly be considered the first sign of a severe downturn. In the context of sharp fluctuations in the value of a cryptocurrency whose increased volatility is on everyone’s lips, even a correction of over 50% can be considered quite normal. This is precisely what we have observed and are still observing in the market.
Causes of Bitcoin Market Correction
There are several primary factors:
- Market overheating and a noticeable imbalance between supply and demand.
When investors start buying more and more cryptocurrencies, the cost becomes so high that it becomes difficult for new investors to buy cryptocurrency with the same intensity as before. There are more and more sellers interested in selling cryptocurrency at the current high price. Supply increases, and demand decreases, eventually leading to a market correction to address this imbalance.
- Actions of the big players.
When big players try to make money by playing with the rate of not the most famous cryptocurrencies, the result can be a significant drawdown in their value. Still, when it comes to the most prominent cryptocurrencies with multi-billion dollar capitalization, eventually, this activity is quite capable of leading to a correction.
- Negative news background.
If even generally insignificant news is constantly appearing in the information space, the cryptocurrency market reacts by adjusting to it. Such notice usually includes threatening statements of politicians on the regulation of cryptocurrencies, introduction of restrictions on their circulation, alleged problems in the work of cryptocurrency exchanges up to reports of their hacking attacks, suspicions of fraud in the market, etc.
Bitcoins are often compared to gold – a classic shelter asset that allows you to secure your savings in case of crisis. Bitcoin is often used by people as protection against inflation, even though its volatility is very high. If you want to learn more about Bitcoin and cryptocurrencies in general, our guides will help you do it, for example, OKEx cryptocurrency exchange or Coinsquare cryptocurrency exchange.
I have been studying cryptocurrency for over 5 years. I have accounts in every exchange and I test everything on myself.
I want this market to be more understandable for everyone.