Why is Bitcoin Becoming Less and Less Volatile?

Bitcoin Becoming Less Volatile

This is because since the inception of bitcoins in the last decade, investors, lover of technology, and even skeptical individuals have been drawn to the BTC mostly because of the basic attributes of BTC, especially the volatility of the price of bitcoins. Bitcoin has been notorious for last swing that rises very high in a short span of time only to plummet just as quickly. However, the recent trend analysis shows that Bitcoin fluctuations may as well be reducing. But is Bitcoin really exhibiting signs of becoming less volatile? Now, let’s discuss little more in detail.

Understanding Bitcoin’s Volatility

To be more precise, the volatility of the Bitcoin price represents the amount of change in this asset’s price within a specific time frame. High volatility means that the price can change dramatically within a short period of time and on the other hand low volatility means that the price does not fluctuate much. Briefly, in the first few years the price of Bitcoin would fluctuate and its value could be impacted by such things as new legislation, speculation, and technological advances or inventions.

Historical Perspective

In the history of Bitcoin, there has been a number of periods that can be characterized as extreme volatility. The biggest one is the 2017 pump; from the beginning of the year the Bitcoin’s price was under $1,000 and rose to nearly $20,000 by the end of the year. However, this skyrocketing was succeeded by the sudden crash in 2018, which witness Bitcoin dropping by more than 80%. That kind of volatility defined Bitcoin in its early years and led to it being widely regarded as a most risky investment.

Recent Trends: A Shift Toward Stability?

However, over the last few years, this nature of fluctuation of Bitcoin prices appears to have reduced, compared to the early days. Several factors may contribute to this perceived stability:

Increased Institutional Involvement: With hedge funds, pension funds or publicly traded companies investing in bitcoin it could be stated that the market is continuously maturing. Such investors tend to have long term investment horizon, which tends to be beneficial to market dealings.

Regulatory Clarity: In the years that followed engagements involving Bitcoin and other cryptocurrencies have become clearer to regulate in most countries. Although it has positives and negatives, regulation has given a certain amount of assurance to the investors; thus, minimising the cases of panic selling or panic buying.

Evolving Market Perception: In the latest few months, more and more people treat bitcoin as “digital gold” or a means of payment rather than an investment. This change of perception may result in better price stability as observed with other well-established financial assets.

As for Volatility, it should be noted that this is a measure by which virtual currencies can be compared with traditional assets, such as CFD stocks or commodities, for example.
While there may have certainly been a reduction in volatility in the period of analysis, Bitcoin is still a more volatile asset than stocks, bonds or gold. For example, Bitcoin’s 30-day rolling volatility is still significantly higher than, let’s say, S&P 500 or gold. Although, this gap has been reducing over the period, suggesting that Bitcoin is growing to be a mature asset class.

This paper aims to identify macro-economic factors that influence the technology industry to contribute towards the development of the topic.

Still, as this paper aimed at showing, both internal factors related to Bitcoin such as its adoption and development, and external macroeconomic factors affect Bitcoin’s price. Prices of commodities, modifications in the policies associated with monetary value and uncertain economic conditions in the world affect the fluctuating prices of bitcoins. For instance, whenever there is a volatile period economically such as cases of inflation then Bitcoin is believed to have an upper hand in that aspect thus keeping fluctuating its price.

Where We Are Heading?

It is very difficult to forecast it’s volatility in future. However, there has been observed a trend of stabilization in the recent period, however, it’s important to understand that bitcoin is much younger as an asset than most of the traditional financial markets. In particular, it should be noted that, with the further spread of adoption and with the market’s gradual stabilization, volatility is unlikely to remain high. Nevertheless, it will likely have a higher coefficient of variation regarding more classical assets, primarily due to its specificity but also because of constant advancements in the field of cryptocurrencies.

Conclusion

Cryptocurrencies, especially Bitcoin are inherently volatile, but if the trend observed over the last decade is anything to go by then Bitcoin appears to be getting less volatile. There are five factors that are the major reasons behind the change: a] higher role of institutions, b] improved market depth, c] stronger regulation, and d] changing perception of the market. Still, Bitcoin is gradually becoming less volatile though it is still riskier as compared to the traditional forms of investment and it is always good for investors to prepare for the worst in terms of price swings.

As the market of cryptocurrencies progresses, it would be interesting to observe how the volatility in Bitcoin will develop in the future years. Thus far, we are beginning to find that sometimes these fluctuations have ceased to occur and thus the incredible price swings may well be vanishing.

About Ashish Singh

I am a blogger and writer too. I love to write on business, finance, lifestyle, digital marketing, and technology.

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