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Short-Term and Long-Term Components of Bitcoin Volatility
Bitcoin’s volatility has unique short-term and long-term impacts. Here’s what you should know about Bitcoin’s volatility.
Volatility is one of the critical risks associated with cryptocurrencies that often makes some investors shy away from investing in crypto. However, volatility is not all bad as it seems. The main characteristic of cryptocurrencies is that they enable investors and traders to profit from buying and selling assets on global markets.
Bitcoin is a highly volatile asset, with enormous and rapid price swings like other cryptocurrencies. Sometimes, even the experts fail to predict its price movements accurately. Nevertheless, understanding Bitcoin’s volatility is essential to making informed investment decisions and protecting your assets from potential risks.
Supply and Demand
Like other investments or commodities, supply and demand are the greatest influencers of Bitcoin prices. The market value of Bitcoin heavily depends on the number of coins in circulation and how much people are willing to pay to acquire it. Bitcoin’s maximum supply is 21 million tokens only, and miners get closer to attaining that target each day.
Experts believe Bitcoin prices will undoubtedly increase as miners narrow down to the target of 21 million tokens. Predicting what will happen to Bitcoin prices when miners reach that limit isn’t easy. However, Bitcoin mining will stop since it will no longer generate profits.
As more prominent financial players race towards Bitcoin ownership in a market with declining supply, prices will likely fluctuate, regardless of the actions they pursue. Nevertheless, supply and demand are critical drivers of Bitcoin volatility that will remain in play for the long term. However, they can also induce short-lived impacts on Bitcoin prices.
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Bitcoin’s market demand mainly increases because its supply is diminishing over time. Long-term investors with massive Bitcoin holdings are hesitant to sell, preventing those with fewer assets from gaining more exposure. In 2020, the National Bureau of Economic Research report showed the world’s top 10,000 investors held a third of all Bitcoins.
Many financial institutions and brokers, such as Yuan Pay Group (Official) are negotiating with the SEC to allow them to introduce Bitcoin-based securities. However, introducing more guards will also increase the Bitcoin holdings of institutional and other more prominent investors. Those investors also drive Bitcoin volatility to some extent.
Bitcoin’s market prices will fluctuate if Bitcoin whales or investors with massive holdings suddenly decide to sell their assets. Such an action would cause panic among medium and small investors, impacting a quick sell-off. However, most crypto exchanges limit how much investors can liquidate daily, weekly, monthly, and annually. Thus, investor actions are short-term components of Bitcoin volatility.
Bitcoin is a decentralized currency and investment asset, not tied to any central authority. It facilitates seamless, secure, instantaneous, and low-cost cross-border transactions. However, numerous government authorities have increasingly raised concerns over Bitcoin regulation, citing the need for new laws to monitor its usage.
News about Bitcoin regulations usually tends to drive Bitcoin’s prices down in the short term. That is because regulations threaten the autonomy that users enjoy in using Bitcoin. Besides, the views of government agencies such as regulatory authorities and legislators about Bitcoin and the crypto market could also impact the asset’s value.
For example, the IRS’ description of Bitcoin as a convertible virtual asset that users can exchange for cash boosts its perception among the public, driving prices higher. Alternatively, reports of the Chinese government implementing laws to ban Bitcoin cause uncertainty in the market, such as moving the value down. Nevertheless, the impacts are usually short-lived.
While many investors view Bitcoin volatility as a risk, it is the grease that oils the wheels of its ecosystem. Volatility causes price swings that enable investors to buy Bitcoin low and sell high, generating substantial returns.
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