What affects the volatility of the bitcoin rate? What determines the dynamics of the price of BTC?

Now, any investor who cares about improving his investment portfolio knows about the existence of bitcoin and looks at it. Potential investors are trying to more closely examine the historical fluctuations in the price of bitcoin in order to assess the degree of risk of investing in it. Since bitcoin, its underlying technology and everything related to them are difficult to understand, many investors try to avoid buying bitcoin .

However, those who are interested in it have even more questions. For example, they are very interested in the question of why the price of bitcoin fluctuates so much, and how to use it to make a profit.

What determines the course of bitcoin?

Each bitcoin price fluctuation is a whole story, which is reflected in two of its directions: supply and demand. In bitcoin, the aspect of the proposal is presented quite clearly: the supply of bitcoin coins is limited to 21 million, and this is a kind of measure to minimize price fluctuations.

The number of coins on the market and the speed of their release are also known, while it is more difficult to determine how many coins are lost forever due to the loss of private keys .

But understanding the demand is a bit more complicated. It is demand that causes the price of bitcoin to fluctuate so much. Here are some factors that influence demand and, therefore, the price of bitcoin:

• Acceptance (recognition, popularity) of bitcoin;
• Extension of ways to use bitcoin;
• Bitcoin market speculation;
• A relatively small market where small players can tip the scales;
• Lack of regulatory restrictions.

Perception of Bitcoin's Purpose

Understanding the demand for bitcoin is almost impossible. This is due to investors looking for a place for bitcoin in the world (BTC identity crisis).

Investors have many questions: What is bitcoin? Is it currency or digital gold? Or maybe both?

A short answer to these questions: Bitcoin was created as a currency, while its deflationary nature and key features (decentralization, immutability, the possibility of p2p transactions ) make it a welcome store of value.

Thus, fluctuations in the price of bitcoins can not always be set next to fluctuations in ordinary currencies, since bitcoin is not associated with interest rates as a currency in banks; its inflation / deflation is ghostly; and its purchasing power depends on the demand for it (demand function), while the coin does not belong to any national economy.

Bitcoin Recognition – Demand Function

However, as an alternative to fiat currencies, bitcoin can be used in any financial transactions around the world. Thus, recognition is a key indicator to explain the demand for bitcoins, and therefore the fluctuations in the price of bitcoins. An increase in recognition in this case also means an increase in the number of people using Bitcoin for their daily transactions.

Bitcoin as a means of preserving value

However, Bitcoin recognition is not an exhaustive “tool for measuring” demand. There are many who buy bitcoin as a store of value and do not use it as a currency. These people are adherents of Bitcoin, but they use it to hedge their funds .

For example, more and more Venezuelans and Argentines are turning to Bitcoin, while the currencies of these countries are experiencing hyperinflation. Such coin keepers do not necessarily spend them at every opportunity.

Bitcoin speculation is the main factor of volatility

It would seem easy to understand the strong fluctuations of bitcoin, given that there are those who spend it and those who keep it.

However, there is a third class of followers of bitcoin – these are speculators who are not worried about hedging and consumption. The only thing that interests them is the benefit of trading bitcoin in terms of fiat money.

The absence of regulatory restrictions and the small size of the market allows speculators to use the price of bitcoin for profit. Those who have watched Bitcoin price trends for a long time know exactly how to use volatility to make good profits. Bitcoin speculators are the main reason for the significant price volatility of bitcoin.

Volatility declining

Even if speculators bear the main responsibility for fluctuations in the price of bitcoin, there has recently been a tendency to decrease its volatility:

Bitcoin price volatility is still far from the absolute monthly change in the price of gold – 2-7%. However, it is declining, and this is likely to attract more risk averse investors to the market. It is hoped that this trend will continue, and we will see a more healthy growth in bitcoin, when the main cryptocurrency will have more supporters and investors.

Publication date 09/02/2019
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