In cryptocurrency, volatility refers to the rate at which an asset price fluctuates. Simply put, it is the changes in an asset price. Assets that have a significant fluctuation in price over time are more volatile than others.
Over the past few years, Bitcoin has increased almost 50 times its initial value. It has become more volatile than other assets like equity or debt. Volatility does not just state the potential for returns on trade. It serves as a risk indicator. The effect of this is that for a short-term investment, Bitcoin becomes difficult to predict than other investments.
In this article, we shall consider what factors influence Bitcoin volatility and how you can factor it in as you trade the coin.
4 Factors That Influence Bitcoin Volatility
The reason why Bitcoin steadily rises and falls in the market is due to :
1. Demand and supply
Most commodity prices are mainly affected by the influence of supply and demand. For Bitcoin, the value is determined by how much investors are determined to buy the limited number of coins in the market. The closer the supply gets to the coin availability limit, the higher prices will go. It depends on the actions of the big players in the market whom are endlessly trying to obtain more assets in a market where supply decreases.
2. Investor decisions
The demand for Bitcoin increases as supply dwindles. Some are known as whales in the market. They are investors who have assets of Bitcoin in tens of millions. They hold this currency in large amounts so that others can have less exposure to them. Imagine if a whale suddenly starts liquidating his assets all of a sudden. Other investors may begin to panic and start liquidating their assets too. This action might lead to the fall of Bitcoin prices. Those who might not liquidate in time may experience huge losses.
3. The hype of the media
The most news outlet and media outlets need content to sell to their viewers. Because of this, it is usually common to see them bring on those they call market experts to give information on a market or so. Most times they present information that is based on opinion instead of evidence. Some hype other cryptocurrencies to remove the market share from Bitcoin. However, though, these hypes only serve major players.
4. Government regulations
The IRS views Bitcoin as a convertible currency because you can change it to cash. It also views it as a capital asset if used for investment. Some regulations demand miners to report any transaction on the coin’s market value based on the day it was received. In any way, the view of government agencies can affect the price of bitcoin.
How to Handle Bitcoin Volatility
The following are important steps to take to deal with the volatile nature of Bitcoin –
1. Diversify your risks
As an investor, do not become entirely focused on Bitcoin. Invest in other assets so as not to be affected in the case of a sudden price decrease.
2. Stay calm. Do not be irrational
Volatile cryptocurrencies such as Bitcoin provide the opportunity to gain profits and experience losses. When this occurs, stay calm and remain focused. Try to study the charts to predict their long-term effect. Do not be distracted by the noise from the internet. Take stock, recognize irrationalities and control fear.
3. Avoid over-trading
During unstable periods, it can be tempting to react to changes in the market. Avoid this. Your money only becomes chewed up and leaves a huge psychological effect on you.
4. Remember that the market is uncontrollable
You will occasionally receive shocking news in the market that tends to affect your investments. Do not fear being out of control of the market. Instead, be aware of it rather than emotionally obsessed.
Summary
As a Bitcoin investor, it is impossible to avoid volatility. So, to handle it and manage its effect on your investments, it is essential to set the level of risk you are willing to take. Also diversify and be aware of your psychological level before trading. Doing this when you have dealings with your exchange provider will not remove volatility but help reduce and manage the risk.
