Bitcoin’s price is extremely volatile.
But why is Bitcoin so volatile?
To get the answer, you have to understand the underlying fundamentals of Bitcoin.
Bitcoin is so volatile because it has a low supply (max. 21 million Bitcoins in the future). Big players could dump a lot of coins on the market and push the price of Bitcoin down. This could result in a downtrend because other investors are scared because the price went down in a short period of time and decide to sell their coins. That’s the reason why Bitcoin is so volatile.
Low supply – Why it matters
People are talking about that Bitcoin is digital gold. But why is that?
Because gold and Bitcoin have similarities.
- Low supply
- Low inflation
- The asset is a store of value (However, some people state that Bitcoin is not a store of value, but the market proves it otherwise)
Low supply leads to a significant issue. Whales accumulate big amounts of Bitcoin and they could more or less control the market.
If they dump their coins all at once onto the market, Bitcoin would probably dump 10-15% or even lower, depending on the amounts of Bitcoins a whale has. The market can’t keep up with the selling pressure and therefore, the price decreases.
But, it also depends on the trading volume of Bitcoin.
Trading volume and the future
If the market has a higher trading volume, it is harder for a whale to dump and pump Bitcoin.
Because he would need more capital to get past the buy or sell order walls. Buy or sell walls are orders from traders/investors who want to sell/buy coins. They place an order and it is automatically performed if the price of Bitcoin hits a certain point.
That’s a buy or sell wall. It is a price point where Bitcoin is usually more stable because traders would need more capital to get past that point.
Therefore, if the market has a higher volume, Bitcoin is not that volatile anymore.
On the other side, the Bitcoin space is known to be volatile and that’s the reason why traders love the space. Think about it, traders are just coming in the crypto market because Bitcoin and other cryptocurrencies are so volatile, but at the same time, they stabilize the price a little bit because they place some sell and buy orders.
Miners and exchanges – The ones who keep selling Bitcoins
So, let’s talk about miners and exchanges and the important role they play in the crypto market.
They are the main source of sell pressure on the market. Miners are selling their newly mined coins because they need to cover their electricity fees and exchanges are selling their fees they got from people trading.
They are constantly pressuring the market with sell orders.
Miners sell pressure however decreases every four years because of the Bitcoin halving. This means, that the reward for finding a block gets halved, and therefore, miners get fewer coins.
However, when more people join the crypto space, exchanges get more fees and, therefore, the selling pressure of them is going up.
Why altcoins are even more volatile than Bitcoin
Let’s have a quick look at some altcoins.
It’s known that some groups dump and pump prices of altcoins. But how is this possible?
Because of the low trading volume some cryptocurrencies have. If they have a trading volume of 1.000-10.000 USD, it is easy for a small group of people to push the price 2x-10x in a short time.
However, the only ones that profit from these actions are the ones who buy in early. Most of the time, the leader of these groups only profit from these actions.
It works as followed. Leaders buy a certain amount of a coin before they promote it. Afterward, they announce a grouped pump of this coin. However, when the pump occurs, these people instantly sell their coins and the price follows.
Afterward, the people who participated lost money and the leaders made profits and they continue with these groups. Sometimes, if people are lucky, they can make 2x profits, but leaders will make the most profits.
To sum this up, you should never join a dump or pump group. There is a high chance that you will lose money even if the group leaders tell you there is no way that you lose money if you follow the instructions.
So, to answer the original question of why altcoins are more volatile than Bitcoin: Altcoins are more volatile than Bitcoin because they have a lower trading volume and people can influence the price with a lower amount of capital.
Why traders love the volatility of cryptocurrencies
When there is volatility, traders make profits.
It’s simple. The more volatility occurs, the more profits can be made. This attracts new traders.
However, when more traders join the market, the trading volume goes up. This results in less volatility, which leads to more stabilize price ranges.
Why Bitcoin drops occur and what new investors in the crypto space do wrong
You know that the crypto market is volatile. But new people are really scared of it.
Let’s imagine you just started researching Bitcoin. On the first day, the price was at 10.000 USD. On the second day researching, the price was suddenly at 9.500 USD.
To a new investor, this is scary because he would have just lost 5% of his investment in one day. On the other side, the crypto market is known that the price could increase by 5-10% in one day too.
But this price fluctuates scares people away. However, in my opinion, people shouldn’t look at the price of an asset.
They should look at the fundamentals and the real value of a cryptocurrency like Bitcoin.
What determines the value of Bitcoin?
There are two viewpoints that you could look at when you determine the value of Bitcoin.
- The price of Bitcoin
- Value in the view of people
The price of Bitcoin
The price of Bitcoin is determined by the demand and the supply. By nature, Bitcoin has a low supply. At some point, there will be only 21 million Bitcoins in the network and there will be no more mined.
So, if the demand for Bitcoin stays the same or increases, the price will go up, because there is a fixed amount of supply.
However, to determine the real value of Bitcoin, we have to look at the fundamentals.
The value of Bitcoin in the view of a person
I could say that something has value and you could argue that this isn’t the case. For instance, I could say that a certain thing that I got from my parents has value, but you could argue that this thing is just a thing.
So, value is first of all subjective, meaning you could feel it has value but others could argue against it.
However, if we look at money, everybody knows it has value. It’s because we trust that currency that it has value. In addition to that, it is trusted by our system (law) that this currency holds value.
So, if we want Bitcoin to be a currency, everybody has to trust it or at least the majority of people.
The price of Bitcoin and the value of Bitcoin from our viewpoint is by definition something different, but people sometimes mix it up.
In my opinion, cryptocurrencies will be at some point trusted and proven enough to the majority of people that they will accept it as a currency. It will happen sooner or later.
But for now, feel free to share this piece of content, so more people will be educated about the crypto space.
Before you go, feel free to watch this video about the volatility from Bitcoin.