What Bitcoin’s Value Says about Its Volatility

The price of Bitcoin is now a globally relevant phenomenon. Traders and analysts alike track it closely to observe the general trajectory of the digital commerce giant. The volatility of Bitcoin refers to its price deviation from the mean in any given period of time.

Needless to say, Bitcoin has undergone periods of extraordinary rises as well as dramatic falls in its decade long existence. Bitcoin went up close to $20,000 in late 2017 and early 2018 before slumping to around $3,200 by Q4 2018. In 2019, the markets have recovered, rallying to about $10,000 at press time.

Bitcoin is certainly now a household name across the world. Coin holders have retail possibilities using Bitcoin that would seem like a dream at inception. The crypto economy is getting more sophisticated with mega exchanges acting as facilitators. You can buy Bitcoin with credit card or even bank transfer easily. Incredibly, Bitcoin has retained dominance over the crypto industry despite competitors like Ethereum having more versatility.

However, the elephant in the room that lingers is that cryptocurrency as a whole is still yet to gain complete market and regulatory legitimacy. The latter is obviously because of the reluctance of regulators like the SEC to completely facilitate all aspects of the Bitcoin economy. An example is as a rejection of ETFs which represent more diversification of crypto.  Other countries like India have gone the extra mile to completely ban trading in cryptocurrency. Nonetheless, Bitcoin trading is booming business globally, with the largest exchanges conducted tens of billions of dollars’ worth of Bitcoin in daily trade volumes

Markets and Volatility

In effect, Bitcoin is still miles away from totally taking the shape of regular fiat currencies. Even though a lot more institutional investors are involved with Bitcoin than before, it still has credibility hurdles to pass. The lingering issue of volatility makes some wonder whether holding Bitcoin is totally safe. Some have rightfully or otherwise assumed that as Bitcoin continues to mature, it will shed off its excessive volatility. Indeed, the rebound from the bear market of 2018 has brought in many investors who had thought of ditching crypto for good. Let’s look at some unique Bitcoin characteristics to factor how volatility plays out.

The Status of Bitcoin as an Asset

It is difficult to tie down the cause of Bitcoin volatility to a single or even a number of set factors. This is because extrinsic and intrinsic factors affect the price of Bitcoin all the time. If you were to take a hypothetical middle value for Bitcoin prices, there are periods of sharp movements towards and away from this mean.

Bitcoin is a unique asset that qualifies as a ‘’real asset’’. Alongside gold, it is one of the few assets whose value does not come from another asset. Accordingly, Bitcoin is very difficult to value using metrics that can work for other assets.

What Drives The Value Of Bitcoin?

There is no shortage of theories to explain how Bitcoin’s value comes about. As the market continues to mature and evolve, some make more sense than others. However, it is more agreeable that what really drives Bitcoin prices is investor sentiment. In other words, what does the market think it is worth?

Since Bitcoin is a ‘real asset’, normal fundamentals don’t necessarily factor in price movements. Therefore, the next best thing is what investors think other investors think. This is what sentiment is in a nutshell. The market is in the constant practice of anticipating what the average opinion expects the average opinion to be.  Gold also has similar patterns as its market value is largely a product of investor sentiment. The glaring irony is obviously the fact that Gold is a standard ‘safe-haven’ store of value while Bitcoin is not.

Why Is Bitcoin So Volatile Then?

Given the large part that sentiment plays in the pricing of a real asset. If the investor sentiment about Bitcoin fundamentals is shaky, prices can have the same trend. The cause of this is probably the fact that Bitcoin is a relatively new technology. Investors cannot afford it the same level of certainty as they do a millennia-old asset like gold. The narrative is almost etched in stone and this gives gold and most precious metals a lower volatility profile.

Meanwhile, Bitcoin does not enjoy the same narrative. This is because uncertainty still factors in greatly in Bitcoin’s supposed fundamentals. Is this volatility something that will end in the near future? That is the million-dollar question. At the moment, the way Bitcoin can break this notion is the sector maturing and its position as an alternative asset class solidifies. A reduction in such uncertainty can give Bitcoin the elusive price stability like gold. Until then, market sentiment, which is susceptible to narratives such as regulatory issues, will hang a cloud on Bitcoin prices.