The erratic price fluctuations of Bitcoin never cease to astound. Its value has gone from a few cents when it was created to nearly $74,000 in March of this year, setting a new record.
Over the course of this lengthy journey, there has been tremendous volatility, with swings of more than 80%. Investors and analysts can’t hope to predict the future of cryptocurrencies without first mastering Bitcoin’s notoriously unpredictable price movements.
As with any young digital currency, Bitcoin’s volatility stems from a conglomeration of factors. Bitcoin and the cryptocurrency market lack established market dynamics, in contrast to traditional assets that have a centuries-long history.
At present, market manipulation causes its value to be reevaluated frequently, resulting in significant price fluctuations in reaction to fresh information and events.
There will only ever be 21 million Bitcoins in circulation, which is one of the primary reasons why its value fluctuates so dramatically. In particular, as demand increases from both retail and institutional investors, the tightening coin supply is making price fluctuations even more severe.
Further exacerbating price volatility is the impact of big investors, sometimes called crypto whales. Because of their substantial wealth, they are able to manipulate market dynamics through massive buy/sell orders, which in turn causes sudden price fluctuations.
The infrastructure and liquidity issues plaguing the cryptocurrency market are still in their early stages, so it stands to reason that any significant transactions will have an impact on prices. The inability to easily enter and exit positions due to a lack of liquidity can amplify price fluctuations.
Some thought that the trading process could become more stable as market infrastructure was developed and spot exchange-traded funds (ETFs) based on Bitcoin emerged. Meanwhile, huge influxes and outflows of capital are causing noticeable spikes.