Bitcoin volatility hit extreme highs in January 2018, with the price of Bitcoin moving an incredible $US2,299 per day. These extreme movements have led many to ask, 'Why is Bitcoin so volatile?'.
The price of bitcoin goes up, the price of bitcoin goes down, and the same can be said of just any tradeable asset.
The US dollar goes up, the US dollar goes down. Apple Stocks go up, Apple stocks go down. And so-on.
But you might have noticed that Bitcoin goes up and goes down a fair bit more and with more intensity than most other assets.
There are, of course, reasons for this.
And while no one can entirely predict the market, everyone’s still going to have a shot at analysing it.
With that in mind, here’s a shot of our own.
The key underlying reason for bitcoin’s volatility is that it is an entirely speculative asset.
No one truly knows how much one bitcoin is worth—though there are plenty of predictions, ranging all the way from $0 to $1,000,000.
It’s the breadth of these predictions that explain a large portion of bitcoin’s volatility, the intensity of the debate, and the fact that bitcoin represents different meanings for different people. (This sounds corny, but we promise it will make sense.)
Let’s talk about what those different meanings around Bitcoin and Cryptos are for each group.
For some, like bankers, governments, and other proponents of the current fiat currency based system, the decentralised nature of bitcoin represents a threat to their centralised control over currency and markets worldwide.
There are clear reasons for their stake in non-adoption, and in stoking the Fear, Uncertainty and Doubt (FUD) around cryptocurrency.
And if you’ve ever even googled bitcoin, you’ll know there is an absolute tonne of FUD being churned out daily. Like any tradable instrument, news events can be a major driver of volatility. This is especially true with Bitcoin and has caused many price gaps.
INCLUDE PRICE GAP CHART HERE
Because the investor base in bitcoin is relatively small, this FUD can hit hard.
For many, bitcoin is their first major investment, and as a result, weak hands and panic-selling are always going to be more common.
Bitcoin doesn’t even have a singular meaning to the people who aren’t invested in the cryptocurrency.
For many, it’s in part because bitcoin appears overly complicated—too many people I’ve spoken to believe you can only purchase whole bitcoins, for instance, and those people are not likely to gain an understanding of consensus or proof-of-work (POW) architecture anytime soon.
Another reason for non-adoption is that bitcoin does not have enough of an immediate use-case for the average person to want to drop their credit cards and embrace this emergent technology called cryptocurrency.
Most people don’t care about Aristotelian definitions of sound money (we’ll get to this later), and the number of people who are still shocked when they find out that major currencies are no longer gold-backed is stunning.
So it’s no surprise that when you combine FUD with complexity and a lack of immediate incentive, bitcoin comes across as intimidating—which has led to slow adoption of the cryptocurrency by the general population.
But even for those who do invest, bitcoin does not have a singular meaning.
For many, bitcoin represents some sort of anarcho-capitalist dream: a vessel for true economic freedom.
For some, an investment in bitcoin is a form of hedging against economic collapse.
Hypothetically, in the case of another collapse like what happened in 2008, bitcoin would have the potential to remain steady as adoption rates go up; we’ve recently seen this in Venezuela and Turkey, for instance.
Click play on the video below to see how bad the situation is in Venezuela.
For others, bitcoin represents a traditional investment—in late-2017, bitcoin felt to many like a get-rich-quick scheme. (Though now it’s looking more like a get-rich-slow scheme.)
It’s hard to know what percentage of investors are in bitcoin for any one of these reasons, though it is a reasonable assumption that the run-up in 2017 was largely triggered by the latter kind: those boarding the hype train before they felt it was too late.
Regardless of the motivations of these investors, however, it is true to say that one person’s reason for investing does not affect the underlying value of an asset.
Only by aggregating the views on bitcoin’s value held by every single investor can we determine the currency’s value: that’s roughly what the market movements are measuring.
The reason for volatility, then, is that the breadth of these views are wider regarding bitcoin than they are regarding, say, the price of a stock in Apple.
This is because Apple stock at least has an underlying value that can be derived from its revenue, partnerships, and other actions made by the company.
Certainly, this value is debated, and traders buy and sell on the basis of this debate, and the stock goes up and down accordingly.
But there are always quarterly earnings reports to fall back on, and actual products and their respective popularity in the market.
Bitcoin, on the other hand, has an entirely hypothetical value.
It is a scarce resource, sure, but unlike something like gold it is artificially scarce: that is, bitcoin is not found after being deposited in the earth’s crust millions of years ago; instead it is found in cyberspace, after being cyclically generated by an algorithm deposited onto the internet in the late 2000s.
The whole thing is pretty wild if you think about it.
Comparing gold and Bitcoin
Even though gold trades primarily based on the fact it is scarce, it also has a use-case in jewellery and electronics.
So, even gold is an imperfect comparison to Bitcoin because gold is materially useful in a number of cases.
In fact, I’d go so far as to say this: Bitcoin is literally useless. It has no use.
And that’s a good thing. Or at least, it might be. See, that’s maybe the core question the volatility of bitcoin comes down to:
How do we value a totally useless thing?
Let us start though by explaining what we mean when we say that uselessness could be a good thing in the case of bitcoin.
We mentioned Aristotle earlier, and we’re now going to invoke him properly.
Aristotle defined sound currency by four absolutes. It must be each of the following:
So long as we don’t get hit by a globally-encompassing solar flare, bitcoin satisfies all of these criteria, which in Aristotle’s eyes at least makes bitcoin a philosophically sound currency.
The only spanner in the works is criterium number four, which is what the market is debating right now: can something useless be valuable just because it’s rare?
Guess we’ll find out soon enough.
We’ve given you the broad-picture, essay-length philosophy underlying bitcoin’s volatility.
Now let us give you some other rapid-fire reasons you can quote at parties, or in the comments section on Forbes’s website.
People are primarily buying and holding bitcoin, which is directly at odds with the purpose of currency.
This is the problem with bitcoin being at once a speculative asset and a currency.
Ideally, people would be spending their bitcoin on goods and services, which would, in turn, incentivise more retailers and contractors to accept bitcoin as payment.
However, because no one knows what a bitcoin is worth, people aren’t spending it, in case they regret it later when/if it increases substantially in price.
And until it’s been adopted by enough of the population in order to become currency, that’s likely going to remain the case for most owners of bitcoin.
People who bought in early hold large portions of the total bitcoin pool and cannot liquidate or trade their capital without substantially moving the market.
Remember the story of the 10,000-bitcoin pizza?
Well, that guy wasn’t the only person holding loads of bitcoin back when it was valued at next to nothing.
There were many people who owned bitcoin then, and lots of it, and in many cases they’re still in possession of those coins—but every time those holders move large portions of their capital, the entire market shifts.
So they don’t move it, or they move it slowly. This is a problem because it means a small number of bitcoin owners have a huge amount of influence over the market.
Bitcoin and cryptocurrency are new, and the law moves slowly.
Governments are barely working out the internet, let alone digital currency. Therefore, there is still a lot of work out in terms of Bitcoin tax in Australia and around the world.
The Australian tax department is well ahead of many others on this, but a hypothetically global currency is unique in that it very intensely feels the effects of the actions, movements, and mutterings of every single government.
When China, Korea, or other Asian markets report bad news on bitcoin, the currency shifts for everyone because the currency is hypothetically borderless.
Bitcoin developers are humans, and they can make mistakes.
There have been bugs in the core bitcoin code and the exchanges where it’s traded, as well as the broader internet, which have led to vulnerabilities in the technology being exploited by hackers—most famously in the case of the Mt Gox exchange, when 5% of all bitcoins in circulation at the time were stolen and never recovered.
There are even stories of how some owners lost in excess of $3million in fraudulent, hacked or collapsed exchanges.
People are nervous and uncertain about most new technologies
Collapsed crypto exchanges naturally make the average person nervous, and is definitely an example of a disadvantage of bitcoin’s decentralised nature: there is little recourse against fraud and hacking.
As much as big banks will exploit and rip-off their customers without blinking, they at least provide pretty good reassurance to customers that their money will still be in their account even if they look away for a few days.
With bitcoin, that guarantee doesn’t really exist.
So when something bad does happen in any part of the bitcoin ecosystem, you can bet your bottom bitcoin the entire market is going to react.
In addition, there are thousands of corporates looking into how they can adapt and use the blockchain technology to benefits their customers. But it is still a work in progress.
We believe the factors above are the key reasons behind the historical volatility and current price volatility of Bitcoin.
It would be fair to say, this is not an exhaustive article.
There are obviously many, many reasons why bitcoin is volatile, and we haven’t covered them all here. We haven't even discussed Initial Coin Offerings (ICOs) and their impact on Bitcoin transactions and the Bitcoin price volatility.
In addition to ICOs, you have increased volatility due to Bitcoin trading (think intraday traders) and even bitcoin mining has a direct influence on the price.
What’s important to remember is that bitcoin is a new type of asset (10 years young and at time of writing, capitalised at approx $109 billion) for the market to deal with, which means no one is right about it—yet.
But when the chips fall, and the penny drops, and all those other clichés occur, you can bet that someone, somewhere will be sitting smug, looking at the price and chuckling: “I told you so.”
Most people involved in the cryptocurrency space who aren’t motivated purely by monetary gain will likely find themselves at some point saying something like this: “One thing I really like about cryptocurrency is that it’s decentralised, and that the currency isn’t owned or controlled by a bank or state.”
With all that in mind, this article will teach you to understand the key differences, successes, and failings of both centralised and decentralised crypto exchanges.
What is a Bitcoin Gift Card?
A Bitcoin Gift Card is the perfect way for the newcomer to get their first Bitcoin. It comes with a paper wallet and simple instructions to set up a software wallet so that you can transact with Bitcoin over the internet. Bitcoin Gift Cards are available in AU$25, $50, $100 and $500 denominations.
Who should buy a Bitcoin Gift Card?
Anyone new to Bitcoin will find no easier way to get their first Bitcoin.
They can be gifted by an existing cryptocurrency enthusiast, or bought by anyone wanting to get involved for the first time themselves.
How can I pay for my Bitcoin Gift Card?
You can pay with either cryptocurrency through our coinpayments.net payment gateway, or you can use Australian Dollars through our POLI Pay facility.
Can I use a Bitcoin Gift Card to top up an existing software wallet?
Yes. When you receive your additional Bitcoin Gift Card, you can simply import the "Secret" wallet identifier from your Bitcoin Gift Card into your existing software wallet. This will move your Bitcoin from your Bitcoin Gift Card into your existing software wallet.
What does my Bitcoin Gift Card include?
Your Bitcoin Deposit, wallet and key generation and network transfer.
How long does it take to receive my Bitcoin Gift Card?
Going through to checkout takes about 2 minutes. You won't find an easier process anywhere. Once you've placed your order, it can take between 10 and 60 minutes to receive your Bitcoin Gift Card depending on the speed of the Bitcoin network at time of purchase.
We have partnered with GiftPay, an aggregator of online deliverable eGift Cards in Australia.
Through our agreement with GiftPay, you are able to purchase a Flexi eGift Card from us, redeemable at a broad range of retailers in Australia.
Watch the Video to see how it works
What is a Flexi eGift Card?
A Flexi eGift Card is an electronic gift card that lets you choose where you'd like to shop! In the past if you were given a gift card for a particular shop but didn't want to buy anything from that shop, you were stuck. But now with a Flexi eGift Card, you get to choose at which shop you spend your gift.
What's more, you may be able to split your Flexi eGift Card and spend it at different shops! For example, if you have a $30 Flexi eGift Card, you could choose to split it up into a $20 Myer eGift Card and a $10 iTunes eGift Card.
Where can I spend it?
You can spend your eGift Card at a broad range of Australian retailers. For a full list of our retailers, click here. (page showing full list of retailer logos)
How do I redeem it?
Your Flexi eGift Card will be emailed to you. Click the link in the email to open your Flexi eGift Card.
Then convert your Flexi eGift Card into any combination of gift cards or vouchers up to the total available balance. How you redeem your chosen gift card depends on the card or voucher chosen.
What Bills can I pay?
You can pay any bill that has the BPAY logo and Biller Code including credit cards.
Are there any payment limits?
Yes. You can pay a maximum of $1000 per transaction based on regulatory limits. You can however break up a bill into multiple $1000 tranches and enter the same biller and customer reference code.
How does the transaction work?
When you enter the amount you wish to pay, the BPAY biller code and your bill’s customer reference number, you will click through to our checkout.
At checkout, you will be asked to leave your details, which enables us to satisfy our legal requirements under the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017. This sounds ominous, but takes about 2 minutes.
When you proceed to payment, you will be shown the digital currency amount payable and the wallet address to send your digital currency to.
Once you have sent your digital currency to our payment gateway wallet, you will receive an email notifying you that your payment has been received. We then convert your digital currency to AUD and pay your BPAY bill on your behalf.
Are there any fees?
Yes. At checkout you will notice our 3% fee added to your bill amount. This is to help us manage the currency risk of a volatile digital currency market when converting to AUD for us to pay your bill. We use a third party payment gateway to enable the digital currency transaction. Our considerations when choosing a gateway was security, pricing (spread) and speed. You’ll note when at checkout (before proceeding to payment) that the price you receive on your digital currency is very competitive. Other digital currency BPAY facilitators charge up to 6% per transaction on the currency alone, which in our view is akin to highway robbery.
[Free PDF Download] 5 Costly Mistakes When Transacting in Crypto Cheat Sheet
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