Why the bitcoin price fluctuates so much

At the end of 2020, crypto investors were able to look forward to a special kind of Christmas present: Bitcoin reached a new all-time high at a price of more than 23,000 US dollars, and quite a few investors took the opportunity to realize price gains.

Today we know: It would have been better to wait a little longer because, in less than six months, the Bitcoin price rose to even higher levels and broke the next record at over US$ 63,500. Most recently, the price even fell below the $30,000 mark at times – and then rose significantly. No wonder these high price fluctuations deter many investors.

Now, volatility is one of the prominent pointers of an investment’s risk. High volatility generally stands for strongly fluctuating and, thus, supposedly unsafe investment forms. But on the other hand, there is also a great opportunity in the volatility of the crypto market, namely the chance of high profits. The significantly higher volatility of cryptocurrencies compared to traditional capital investments has several reasons, ultimately based on the peculiarities of the crypto markets and making up the appeal of investing in digital assets.

Anyone who looks at the fluctuations in the crypto markets quickly realizes that price jumps of ten percent and more per day are by no means unusual for Bitcoin or other cryptocurrencies. However, this applies to price increases and price losses: volatility increases the risk and the opportunity. A loss of almost 50 percent within a few days, as Bitcoin recently experienced, initially sounds like a severe setback. However, an investor who has recently enjoyed a tenfold increase in his investment – i.e., a price increase of 1000 percent – is also relatively relaxed about halving the value.

According to the Bitcoin Code App, Investors with a long-term perspective, in particular, will find an investment opportunity in cryptocurrencies that involve high price risks and a large number of other risks, but at the same time, can also offer the potential for a significant multiplication of the investment.

24/7 trading without rules

A unique feature of the crypto markets that should not be neglected is that hundreds of trading venues worldwide enable trading in digital currencies around the clock, seven days a week. Furthermore, these trading venues are often not subject to government regulation, so there are no regulations for price determination, nor is there the possibility of trading being suspended. Thus, there can be a significant price distortion at times of low trading activity, for example, on a Sunday or public holiday, even with relatively low turnover.

Anyone can pry

Another important aspect of crypto trading venues is that it is straightforward for investors in the crypto markets to make leveraged investments, meaning taking prominent positions with a relatively small amount of capital, thereby significantly increasing the potential for profits and losses. Suppose many investors are invested in a market via leveraged positions, the intensity of price developments increases. If an investor relies on rising prices with leverage, he is also leveraged if prices fall. A relatively small drop in price can trigger significant losses and lead to a forced sale of a position, generating additional selling pressure.

Three reasons why the Bitcoin price could continue to fall

1. Important mark undershot Bitcoin fell below the $ 30,000

Mark on Tuesday. The latest decline breaks a lot of beliefs about bitcoins. Many investors are said to have set a so-called stop-loss mark here. If the price falls below this threshold, the bitcoin you own is no longer yours.

The falling price unsettles investors who now want to take their profits or reduce their losses. So, in principle, investors are doing damage limitation. For the time being, however, there was no further sell-off even after falling below the $30,000 mark.

2. States rebel against bitcoin

Bitcoin founder Satoshi Nakamoto created the cryptocurrency to create a decentralized network independent of government control. Increasingly, some states are now taking action against cryptocurrency. China, for example, is increasingly cracking down on mining,

The government justifies its crypto campaign by saying that mining is too energy-intensive. It consumes as much energy as small industrialized countries. But it is still doubtful if this is the sole motivation of China’s repressive regime. After all, bitcoin payments escape the control of the otherwise always controlling state.

3. Scepticism among institutional investors is growing

The crypto scene cheered when the payment service provider PayPal started accepting Bitcoin payments. The commitment of the central US banks Goldman Sachs and JP Morgan also had a positive effect on the price. But institutional investors are currently shying away from Bitcoin. Too volatile, too uncertain – that’s the motto of many banks. HSBC and London-based asset manager Sun Global just stated that they do not want to enter crypto trading.