Why Does Bitcoin's Price Fluctuate So Much?

Bitcoins price rose from Rs 2.79 lakhs on 25th August 2018 to Rs. 14.31 lakhs on 15th of December 2018. Last week the price stooped as much as half of it to Rs 7.46 lakhs (18th January). The volatility of Bitcoin's price is based on a few interesting factors. Let us take a look at them.

Bitcoin is not completely understood

Founded in 2009, Bitcoin is in the market for almost nine years, but the technology is still relatively new. It is not entirely understood by the majority of the population, raising doubts about its viability.

Negative criticism all over media

The past few weeks saw the media flooded with statements of South Korea's government planning to ban cryptocurrency and China cracking down its exchanges. It was the major cause of the drop in Bitcoin and other big virtual currencies like Ether and Ripple.

Bitcoin has been called a Ponzi scheme, and there have also been fears over the security of the system after another South Korean Exchange was hacked.
These incidents have raised doubts among investors and created panic leading to sudden withdrawals in investments.

 

Bitcoin ownership is concentrated among a few

It is estimated that 95% of the Bitcoins are owned by only 4% of the people with the virtual currency leaving the decision of its fate on a few individuals. So even if one person decides to sell off all his/her bitcoins, it could significantly affect its rate.

Bitcoin's value cannot be managed by any government

Let us compare Bitcoin with traditional currency. A country can regulate its economic policies and control the rise or drop in its currency's value. This method is not applicable to Bitcoin as it is decentralized (has no higher authority or government body controlling it).

It has properties similar to gold with preset limits set by its creators. Bitcoin can be mined only to the extent of 21 million coins. Now the fluctuation of prices will depend on how its investors decide to allocate its use.

 

Tax regulations of governments

Governments of various countries including India are imposing taxes on Bitcoin profits. There is both a negative and positive effect in bringing tax regulations to blend with cryptocurrencies.

The positive side is that this shows that the governments are recognizing Bitcoin or other cryptocurrencies. The negative aspects include increasing complexity in investing in them. If it's difficult to understand, investors try to stay out of it.

Another major factor is the currency's utility is only practical if it is accepted by large masses.

 

It is different from others

Bitcoin was originally created to be "cash for the internet," but there were complexities in processing the transactions (mining). This made the users question its spendable property.

Over time, its acceptability improved. More bitcoins were mined and circulated, increasing its value immensely. But, there still lies uncertainty about it being a convenient mode of payment.

Also, unlike stocks, there are no fixed trading market hours, it is traded 24/7 making it unstable.

 

Conclusion

Bitcoin's value shall become less volatile as its acceptability improves. Bitcoins resting with a small portion of the population will only cause individual actions affecting the whole system.

Government regulations might help stabilize price movements and end scams connected with cryptocurrencies.