Volatility is an index often feared by investors and traders. However, when identified and used correctly, it can be an advantage in forecasting future prices and preparing the portfolio by reallocating assets. It’s not always necessary to buy or sell when prices change, as this is often a cause of FOMO (fear of missing out), which drives individuals into making decisions without considering technical indicators.
Bitcoin, the first cryptocurrency, was well-known for its volatile spikes. The asset has some of the most impressive crashes in history, but these have only paved the way towards a stable asset. According to the latest BTC price prediction statistics, the cryptocurrency’s value is expected to increase by 5% over the next few years. This will coincide with its growing scarcity, as experts forecast the last Bitcoin to be mined around 2140.
But what makes Bitcoin so volatile, and why did it become one of the safest cryptocurrencies in the market? Let’s find out more.
3 key dynamics affecting the Bitcoin prices
Since Bitcoin is still a financial asset, the most basic mechanics that affect its prices are supply and demand. Bitcoin has a maximum coin supply of 21 million, which users worldwide mine to contribute to its scarcity and the blockchain’s security. Every four years, Bitcoin undergoes the halving process, in which the rate at which new Bitcoins enter the network is halved. This makes mining more difficult yet competitive, slowing down the supply and boosting demand.
The regulation surrounding Bitcoin is the next most important factor. While the first years of Bitcoin’s growth were marked by a lack of a legal framework, the subsequent years saw regulation evolve as more cryptocurrencies appeared on the market. Guidelines such as the Fifth Anti-Money Laundering Directive or the Ontario Securities Commission have allowed Bitcoin to grow within a secure environment, making it a more trusted and hence demanded asset.
Finally, the market sentiment surrounding the asset, which included both positive and negative news, contributed to Bitcoin’s popularity. The newness of the financial asset brought to light the massive interest in decentralized systems, as well as the resistance to change, which made Bitcoin controversial yet interesting.
What are the consequences of Bitcoin’s volatility?
Volatility influences investors’ long-term planning and risk management, as they must decide whether the best course of action is to hold and wait or exit before incurring a significant loss of asset value. This, of course, is not that easy, since Bitcoin is now surrounded by numerous other cryptocurrencies that can move in tandem with it or against it (during the altcoin season).
In other words, there are moments when the value of all cryptocurrencies, except Bitcoin, will surpass that of Bitcoin, and recognizing these shifting signs is not always clear. According to Binance.com Research, “Although volatility traders may see continued calm next month, as seasonal statistics show October and November are historically the two months with the lowest Bitcoin volatility, for price action traders, October is also known for reversing September’s weakness.”
The altcoin season typically occurs when Bitcoin prices increase, as it makes investors more interested in altcoins due to their affordable prices and profitable projects and investments.
Why is it so difficult to predict Bitcoin’s volatile nature?
Bitcoin will be 20 in a few years, but there are still so many things we don’t know about it. For instance, learning to recognize the signs of volatile shifts remains challenging, particularly given the newness of the cryptocurrency market. While analysts and investors leverage the most sophisticated models and analytical tools based on Bitcoin’s historical data, there’s simply not enough context compared to the stock market, where it’s somewhat easier to forecast accurate trends.
Another struggle is the crypto market’s highly sentiment-driven nature. Investors and traders may adjust their strategies and opinions in response to factors such as geopolitical developments and technological advancements, potentially leading to a disproportionate impact on value.
Prediction models don’t always work in the crypto market. While this aspect is intriguing for some traders, who can take advantage of the lack of structure, finding a balance for long-term investors often involves holding on for as long as possible.
Still, why has Bitcoin become safer?
Despite all these challenges, Bitcoin remains the first recommendation for beginners in the industry, as it has gained trust and considerable security due to its market capitalization. Also known as market capitalization, this index determines the total value of all tokens that have been mined, showing their total value, strength, and liquidity. Experts and investors consider Bitcoin a lower-risk investment, characterized by a high liquidity level, which means prices don’t drop significantly when investors sell in large quantities.
There are other large-cap cryptocurrencies, such as Ethereum and Ripple, that people also consider safe. Next, we have mid-cap cryptocurrencies, which have a lower market capitalization and are riskier, but they offer huge growth potential. Finally, low-cap cryptocurrencies are the highest-risk investment, typically being meme coins or newly created assets.
How can investors navigate volatility?
Volatility will always be present in the crypto market (as it is to all other financial instruments). Therefore, investors and traders can learn to navigate it with basic strategies, such as diversifying their portfolios with a vast array of cryptocurrencies that can protect the portfolio from losses. The goal is to have the assets that grow in value when Bitcoin decreases and vice versa.
Trading orders are also important, and they include stop losses, which are tools that automatically sell bitcoins when prices reach a certain level. This helps cap potential losses before they intensify and lead to other massive problems. Investors can also use limit orders, take-profit limit orders, or stop-loss market orders.
Final considerations
Bitcoin is a volatile cryptocurrency, but due to growing interest and regulatory developments surrounding it, it has become the leading decentralized asset on the market that investors and traders trust. Its volatility stems from factors such as supply and demand, as well as market sentiment, but has changed over the years due to a growing market capitalization and a diversified cryptocurrency market.
