March 16, 2018Article

Bitcoin’s Volatility: Not As Surprising As One Would Expect

Though Bitcoin has quickly become the next best thing, it still has a lot to prove before it can cash into widespread acceptance and use. A superficial analysis of this cryptocurrency reveals high chances of making super profits for investors. While its potential as an alternative to centralized economies and devaluing local currencies makes it easily noticeable, Bitcoin has proven to be as speculative and volatile like any other asset in the financial marketplace.


Sharp drops and surges

Over the last couple of months, Bitcoin has experienced sharp drops and surges. In late December 2017, it traded at about $15,000. The price increased marginally and the digital currency started 2018 trading at about $17,000. Afterwards, it experienced a downward spiral that witnessed a low of $6,800 on February 5 before its price began to rise again to trade at $11,010 on February 19, 2018. This volatility has given credence to what has been speculated about its future. However, its frequent price fluctuations seem not to discourage investors.

Alessandro Cadoni, co-founder of Friendz, notes, "Bitcoin is on everybody’s lips, becoming a popular topic of conversation. Just one year ago, 12 million Bitcoin wallets were opened, today there are 23 million wallets in existence. Millions of people are cueing in front of the exchanges’ entrance doors to join the token rush, making the coin's value to increase in price. And when someone in the whales’ circle decides to cash out, the price is affected and the volatility generated."


Possible crash anticipated

As a new form of currency weaving itself into the market, Bitcoin is bound to attract speculation. However, financial pundits and oracles predicted months ago that the Bitcoin bubble would eventually pop. According to speculators, this bubble has only just begun to get smaller and will take months to fully diminish. It could follow similar trends, such as the 1929 stock market crash which began in September and fully bottomed in February of 1930. Another example is the 2008 stock market crash that began in June and fully deflated in February of 2009.

With the currency already in its adolescent stage, it’s already facing a sharp decline. Though there will be moments when its value increases after hitting a “false bottom”, it will remain largely unsustainable in the long-term. To remain viable, Bitcoin has to mature past adolescence and its stability might be realized only after regulatory measures are introduced to counter its original appeal.

Since the start of 2018, several countries, including South Korea and India, have introduced regulatory procedures to govern Bitcoin trading to make it more attractive and boost its market performance.


No base price

Unlike Microsoft’s stock during the 2000 dot com burst, Bitcoin doesn’t have a basic price to fall back on. Stock market prices don’t bottom at zero. Instead, they remain stable at a fundamental price, allowing investors to realize their original investments and benefit from potential returns, however small they may be.

Bitcoin has no such feature, an aspect that makes its price difficult to discern whether it’s trading up or down. This increases its volatility and and makes its price easy to manipulate in an unregulated market. It also contributes to a rise in scams which makes potential investors more wary of whether or not their experience of investing in Bitcoins will be advertised.

Roman Guelfi-Gibbs, CEO and Lead Systems Designer of Pinnacle Brilliance Systems Inc., observes, "Lower volume than world markets and smaller order books allow fewer people to move the market in significant short term moves. In addition, crypto is a young market with an abundance of new traders who tend to react emotionally when the market rallies/drops or strong fundamentals come into play.”


Low recognition

Though Bitcoin acceptance continues to grow in some communities, it’s yet to reach a level where it becomes a real currency with wide recognition and application in the global economy. Also, some big financial players in the market are opting to keep off Bitcoin, chalking it up to price volatility.

Marcus Vandea, CEO of Playfold, says, “Because it is inherently tied to speculation and the goals of financial institutions, Bitcoin ushered in this great new technology, but it struggles to be recognized as a real currency with real everyday use in the economy."





Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.