What are the factors that control bitcoin prices ?
Price fluctuations in the Bitcoin spot rate in cryptocurrency trading platforms are driven by many factors.
The volatility index in traditional markets is measured by the volatility index, also known as the volatility index (VIX).
Recently, the volatility indicator for bitcoin has also become available.
Known as the Bitcoin Volatility Index, it aims to track the volatility of the world's leading digital currency by market capitalization over different time periods.
The value of Bitcoin has historically been volatile.
In the three-month period from October 2017 to January 2018, for example, bitcoin's price volatility has reached nearly 8%.
This is more than double the volatility of Bitcoin in the past 30-day period ending January 15, 2020.
Why does the value of bitcoin fluctuate?
Bad news negatively affects adoption rate:
News events that frighten Bitcoin users include geopolitical events and government-issued statements in which Bitcoin is likely to be regulated.
Among the early adopters of bitcoin were several previously bad actors, who produced major news stories that frightened investors.
Bitcoin news that has made headlines over the decade or so of the cryptocurrency's existence includes the bankruptcy of Mt. Gox in early 2014, and more recently the Youbit trading platform.
Among the other news that shocked investors was the high-profile use of bitcoin in drug transactions and the purchase of weapons through the “Silk Road” store on the dark web that ended with the FBI shutting down the market in October 2013.
All of these incidents and the general panic that followed sent the value of bitcoins against fiat currencies rapidly declining.
However, currency investors have viewed these events as evidence that the market is maturing, which has led to a significant appreciation of bitcoin against the dollar in the short period immediately following the news events.
Bitcoin value swing:
One of the reasons for bitcoin's volatility against digital currencies is the perceived store of value against fiat currency.
Bitcoin has gold-like properties.
It is governed by design by developers of the core technology to limit its production to a fixed amount of 21 million bitcoins.
Since this differs markedly from fiat currency, which is dynamically managed by governments that wish to maintain low inflation, high employment and satisfactory growth by investing in capital resources, as economies built with fiat currencies show signs of strength or weakness, Investors may allocate more or less of their assets in Bitcoin.
Uncertainty about the future value of Bitcoin:
Bitcoin’s volatility is also due in large part to divergent perceptions of the intrinsic value of the cryptocurrency as a store of value and as the way value is transmitted.
A store of value is the function by which an asset can be useful in the future with some predictability.
The store of value can be saved and exchanged for some goods or services in the future.
A method of transferring value is any object or concept used to transfer ownership in the form of assets from one party to another.
Bitcoin's volatility right now makes it a somewhat inconspicuous store of value.
As a result, we see that the value of Bitcoin can fluctuate based on news events just as we observe it in fiat currencies.
Bitcoin whale movement:
Bitcoin's volatility is also driven to some extent by the holders of large proportions of the total coin.
For bitcoin investors whose current holdings exceed about $10 million, it is not clear how they will sell their large position without moving the market too hard.
In fact, it may not be clear how they would describe a position of this size in a short period of time at all, as most cryptocurrency exchanges impose 24-hour withdrawal limits well below this limit.
Security breaches:
Bitcoin can become volatile when the Bitcoin community exposes vulnerabilities in an effort to produce massive open source responses in the form of security fixes.
Bitcoin developers must disclose security concerns to the public in order to produce robust solutions.
It was the hack that drove Youbit to bankruptcy while many other cryptocurrencies made headlines for being hacked or exposed to various thefts.
For example, in the month of April 2014, OpenSSL vulnerabilities that were attacked by “Heartbleed” and reported by the security chief at Google, caused the price of Bitcoin to drop by 10% in one month.
Feelings of fear:
It should be noted that the aforementioned thefts and the ensuing news of losses had a dual effect on volatility.
They have reduced the overall supply of bitcoin, which results in a potential appreciation of the remaining bitcoin due to increased scarcity.
However, overriding this lift was the negative impact of the news cycle that followed.
Notably, other bitcoin portals viewed the massive failure of the Mt.Gox platform as positive news.
As certified firms were left out early on from the market due to mismanagement and dysfunctional processes, later entrants learn from their mistakes and build stronger operations in their own, thus enhancing the overall cryptocurrency infrastructure.
The high inflation of the countries’ economy and the trend towards Bitcoin:
The case for using Bitcoin as a currency for developing countries that are currently experiencing high inflation is valuable when looking at the volatility of Bitcoin in these economies versus the volatility of Bitcoin in US dollars.
Bitcoin is less volatile against the US dollar than the Argentine pesoTeni high inflation against the US dollar.
However, the cross-border movement of bitcoins makes it a very potential borrowing tool for Argentines.
Likewise, financiers outside Argentina could earn a higher return under this scheme than they could by using other debt instruments denominated in their local currency, potentially offsetting some of the exposure to Argentina's hyperinflationary market.
Tax treatment raises volatility:
According to the US Internal Revenue Service (IRS), Bitcoin is actually an asset for tax purposes.
This had a mixed effect on bitcoin's volatility.
On one side, any statement recognizing the currency has a positive effect on the market's valuation of the currency.
Under the new tax law, users are required to record the market value of the currency at the time of each transaction, no matter how small.
This need for record keeping can be slow to adopt as it seems to be a lot of trouble for a lot of users.
The decision to designate the currency as a form of property for tax purposes may be a signal to some market participants that the IRS is preparing to implement stronger laws later.
Too strong currency regulation may cause the rate of currency adoption to slow to the point where it is unable to achieve universal adoption which is a critical factor for its overall benefit in society.
These were the most prominent potential factors causing the fluctuation and volatility of the value of the Bitcoin currency