Why Is Bitcoin so Much More Volatile Than Other Investments?

Why Is Bitcoin so Much More Volatile Than Other Investments?

by July 2, 2021
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Volatility has been a defining factor of Bitcoin since its inception. We see volatility in every type of market to some extent, but cryptocurrencies are far beyond what most investors typically expect. Price changes allow investors to buy low and sell high. This can make money faster than the long-term trends, which are much more even for most investments. Bitcoin, on the other hand, shows extreme fluctuations in value that far outstrip average volatility.

Normal Market Volatility

In general financial markets, investors buy and sell based on news and developments regarding specific industries or companies. The volatility is due to a change in the expected long-term value of the stock in question. A good sales report or announcement of a new program causes investors to have more faith in the company, and so they buy, driving up the price.

While major events can spur sudden volatility, investments are generally reasonably steady. Rapid fluctuations aren’t expected in most industries, aside from major economic events such as the financial crash of 2008. Bitcoin and other cryptocurrencies can see their prices swing dramatically in either direction. While stocks might increase 10 percent in a single year, We’ve recently seen Bitcoin grow ten times over in the same time frame.

Bitcoin’s Early History Still Casts a Long Shadow

So what are the causes behind Bitcoins volatility? As a result of many disparaging news stories over early development, Bitcoin has a relatively low adoption rate. For the past 12 years, there have been many significant events that continue to cast Bitcoin in a negative light. Many early adopters used Bitcoin for criminal activities online, and several exchanges have either gone bankrupt or been revealed as scam operations.

These kinds of stories severely sour the general public on Bitcoin. When such developments occur, investors are quick to pull out. Whenever this kind of panic happens, there is a compounding effect of dropping prices, driving out even more investors. Generally, many investors in Bitcoin are prepared to exit at a moment’s notice because they believe that the next crash could see the value fall for good.

Perceived Value Driving Short-Term Trends

Much like how regular volatility functions, the way people see Bitcoin’s value sometimes changes. When people see mainstream companies starting to accept Bitcoin, investors believe that the currency is beginning to show more legitimacy, increasing the perceived value. Similarly, when there is a discussion about legislation against cryptocurrencies, people are concerned and pull out. There are many stories on both sides coming out every day. This leads to rapid shifts in public perception.

One major factor that drives prices up is the difference between Bitcoin and fiat currencies. Fiat currencies like the US dollar can be printed in any amount and undergo inflation. This means that every year, one dollar buys less than the year before. Bitcoin, on the other hand, has a fixed limit to the eventual amount of coins produced. This makes it similar to gold in that there is built-in scarcity. This gives Bitcoin great potential as a long-term store of value, despite current volatility.

FUD and FOMO

FUD is a common finance acronym that stands for fear, uncertainty, and doubt. It refers to investors that are too hesitant or pull out too early because of perceived risk. These investors aren’t receiving new information. Instead, they allow their concern over losing their investment to change their minds afterward. Even slight downward fluctuations can exacerbate FUD and lead to mass selloffs.

Bitcoin is the prime example of FOMO in investing. FOMO stands for fear of missing out, and it’s a major driver of Bitcoin investments. People see how many times Bitcoin has doubled, tripled, and increased tenfold over the years, and they don’t want to miss their chance. Unfortunately, FOMO and FUD go together, and many who buy at a new all-time high end up selling off after the first drop.

Scammers use fear and uncertainty, as well as greed in very persuasive ways to promote various scams. We were almost tempted to join one of these schemes, but fortunately we had the good sense to do some proper research and ended up on a website named ScamCryptoRobots. After reading a review we immediately understood that it’s best to move on and find something else.

How Long Can This Volatility Last?

It seems unreasonable to believe that Bitcoin can stay this volatile forever. The original concept was that Bitcoin could be a real currency used for genuine transactions. A currency that will be either half or double the current value a month from now isn’t beneficial for doing actual business, and so volatility will have to fall before we ever really see Bitcoin as a currency. If the swings do continue or even increase, we might someday see Bitcoin crash down to zero.

Featured image: Photo by André François McKenzie on Unsplash

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