What makes Bitcoin so Volatile?

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Cryptocurrency values keep fluctuating every day. The market is so volatile that people think twice before investing in cryptrocurrencies. This volatility in the value of Bitcoin prices is measured in terms of Volatility index. Even though it is still not a widely accepted index, it is prevalent in the market. Cryptocurrency market is slowly gaining recognition these days. But investors are now aware of the fact that the value of Bitcoin can fluctuate up to an extent of 10x its initial value. Some of the reasons for its volatility are

Bitcoin’s early users triggered a type of fear among investors with their stories. Some news even dealt with cases of bankruptcy among cryptocurrency investors. Also there were other news articles such as the drug transactions that ended with the FBI intervening and shutting down the market place way back in 2013.All these instances added fuel to the reduction in value of Bitcoin in its initial days. But many investors thought this was a wonderful opportunity to invest and increased its value against the dollar in the short period.

Some of the properties of Bitcoin are similar in case to that of Gold. Its production is limited. There is a market cap limited to 21 million on the number of Bitcoins that are being produced. Hence Bitcoins are largely different from Fiat currencies. Fiat currency values on the other hand is governed by Governments who adjust it in order to maintain growth rates of the economy, low inflation rates etc. Investors invest in Bitcoin based on the fluctuations in the value of Fiat currencies.

The value or the price of free bitcoins is also largely dependent on its capability to function as a store of value and a method of value transfer. An asset is considered to be useful in the future based on some predictability and this is based on its store of value feature. Method of value refers to the value generated due to transfer of assets from one party to another. The volatility of Bitcoin, makes people to doubt about its store of value attribute. These two features further vary in accordance with the value of dollar and other fiat currencies. This can cause fluctuations in its value.

Nowadays there are many news articles related to cyber crimes wherein Bitcoins are at risk. These security problems can trigger fear in the minds of people about the loss of their money and this can further lead to drastic fluctuations in its price.

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