By now, anyone who is thinking about their investment portfolio is aware of Bitcoin’s existence. As a prospective investor, a closer look at historical Bitcoin price fluctuations, signals high risk. Since understanding Bitcoin fundamentals and what it can be used for is a little abstract, many investors avoid buying Bitcoin altogether. But those who are interested, still ask themselves why Bitcoin prices fluctuate so much, and how they can take advantage of this to turn a profit. Here are some answers as to why Bitcoin prices fluctuate so drastically.
What do Bitcoin Prices Depend on?
Every price fluctuation tells a story. That story has two sides to it: demand and supply. With Bitcoin, the supply side is pretty clear. Bitcoin supply was designed to minimize price fluctuation, even if that was an inadvertent feature. There are a set number of coins that will be minted and the rate at which they are released into the money supply is set. The only possible unknown there is the number of coins that are lost and will never be transacted with again.
The demand side is a little trickier to understand. It is ultimately demand which makes Bitcoin prices fluctuate so much. Here are some factors that influence demand and therefore fluctuation:
- Bitcoin adoption
- Expanding use cases for Bitcoin
- Price Speculation
- A relatively small market in which small players can tip the scales pretty easily
- Lack of regulatory constraints
Price Fluctuation Depends on the Perception About what Bitcoin is For
Understanding demand for Bitcoin is almost impossible. This stems from its crisis of identity in the eyes of the investor. What is Bitcoin? Is it a currency, or is it a digital version of gold? Maybe both? The short answer is that Bitcoin was created as a currency but its deflationary nature and its key features – decentralization, immutability, P2P nature – all make it a desirable store of value in theory.
As such, its price fluctuations cannot necessarily be understood like those of a currency. Bitcoin has no interest rates, its inflation – deflation – rate is elusive, and its purchasing power is a function of demand since Bitcoin doesn’t have a national economy behind it.
Bitcoin Adoption as a Function of Demand
But even without a national economy behind it, Bitcoin can potentially draw all the advantages of being used worldwide for any kind of transaction. Therefore, adoption is a crucial metric to try to understand demand and through it, Bitcoin price fluctuation. If adoption increases, then more people will be able to use Bitcoin for their day to day transactions. This should push prices up, and it is part of the reason why Gavin Andresen launched the first Bitcoin faucet.