If you’ve been keeping an eye on Bitcoin, you’ll know it’s the world’s flagship cryptocurrency, the king of its domain – and like any royalty, it has its quirks. One of those quirks is volatility. Bitcoin’s price can swing wildly, leaving even the most seasoned investors reaching for the motion sickness bags. Don’t stress about it – we’re here to explain what’s going on and guide you through the ups and downs of Bitcoin’s prices.
Making Sense of Bitcoin’s Fluctuating Prices
Bitcoin’s price is notorious for its dramatic ups and downs. It’s what makes headlines and sends ripples through the financial world. But what’s actually behind these sudden moves?
- Market Dynamics – At its core, Bitcoin’s price is affected by supply and demand. When more people want to buy Bitcoin than sell it, the price goes up. Conversely, when more people want to sell, the price falls. It’s Economics 101, but with a digital twist. Stemming from this basic principle are somewhat more complicated market dynamics that affect the price, for example the Bitcoin future markets and Bitcoin ETF markets. Nevertheless essentially it is supply and demand that is in play.
- Media and Public Perception – The media plays a big role in Bitcoin’s price changes. Positive news can lead to price surges, while negative news can cause declines. It’s all about how people perceive Bitcoin’s future. If the outlook is good, more people want in, driving up the price. Sudden (unexpected) major events, such as wars, geopolitical unrest, and natural disasters can have an effect. Recently, tensions between Iran and Israel, where Iran sent rockets to Israel, immediately led to Bitcoin prices dropping by 10 percent.
- Regulatory Announcements – Bitcoin sits in a grey area when it comes to regulation, and governments are still figuring out how to deal with it. When a country announces new regulations, it can affect Bitcoin’s price. Positive regulatory news can give it a boost, while crackdowns can lead to drops.
- Changes in Interest Rates – When interest rates go up, people often find traditional investments like bonds more appealing because they can offer better returns. This can cause them to pull their money out of riskier assets, including Bitcoin. Since Bitcoin is considered a high-risk investment, its price is particularly vulnerable to these kinds of changes in how investors feel. So, a rise in interest rates can lead to a drop in Bitcoin’s price.
- Market Confidence – When it comes to different types of investments, if investors are feeling optimistic, they often choose to put their money into things that come with more risk, like stocks and Bitcoin, hoping they’ll make more money. On the other hand, if they’re feeling wary, they prefer to go for safer options like gold and government bonds. Therefore, when interest rates go up, it can make investors want to play it safe, which means they might start selling off their riskier investments, including Bitcoin, to move their money into safer places.
Managing the Highs and Lows
So, how do you keep your cool when Bitcoin’s price is bouncing around like a yo-yo? Here are some strategies:
- Stay Informed – Knowledge is your best defense against volatility. Keep up with the latest news and trends in the cryptocurrency world. The more you know, the better prepared you’ll be to make informed decisions. Understanding Bitcoin mechanics and the history of the Bitcoin network will also help in dealing with price volatility and help you better understand news and other developments. In this blog post you can find our recommendations of five books that will help you understand Bitcoin.
- Understand Your Risk Tolerance – Not everyone is cut out for the high-stakes world of Bitcoin investing. It’s important to understand your own risk tolerance and invest accordingly. If you’re not comfortable with large swings in value, you might want to reconsider how much you invest in Bitcoin.
- Long-Term vs. Short-Term – Straighten out your goals. Are you in it for the long haul, or looking for quick gains? Your approach to Bitcoin’s volatility will differ depending on your investment horizon. Long-term investors might shrug off short-term fluctuations, while day traders might capitalize on them. Regardless of your goals, it is normal to be somewhat concerned to see a price drop. However, it is our experience that the longer you have been holding Bitcoin, the better you are able to deal with volatility. You will learn that 10-15% dips in prices can happen. And usually prices will correct thereafter.
On a final note, many think that as more individuals and institutions start using Bitcoin, its price won’t fluctuate as wildly. Right now, though, those fluctuations are still a big part of Bitcoin’s appeal, offering excitement and sometimes a chance for profit.