Bitcoin has such a volatile and unpredictable nature that many people wonder whether there is any value in investing in the digital asset.
Investing in Bitcoin is certainly not for the faint-hearted, but it’s an appealing option for those who believe in its long-term potential, who want to diversify their portfolio, and who have a high level of risk tolerance.
Why is Bitcoin so volatile?
The price of Bitcoin has been on a roller-coaster ride over the past few years and, so far, the trend shows no signs of abating.
Just last weekend, Bitcoin fell by 4.6%, and on Monday it was hovering around $6,600 – a far cry from the summer when it broke through the $13,000 mark. The price of Bitcoin can swing wildly in a matter of minutes.
One of the reasons why Bitcoin is so volatile is it is still a relatively new asset, having been launched just a decade ago. As we’ve seen from the dot-com boom and bust, people tend to get very excited about new technologies, invest huge sums of money, and then reality sets in.
The total market capitalisation of Bitcoin, and indeed all digital currencies combined, is fairly small when you compare it with more traditional assets like stocks. Small markets are more vulnerable to manipulation and fluctuations in supply and demand. If a major investor decides to sell their holdings, it can cause a sharp drop in price.
Despite Bitcoin’s volatility, it remains an attractive asset for lots of investors around the world. Many people who invested in Bitcoin from its early days have become “Bitcoin millionaires”, so it’s no surprise that other people want to replicate their success.
Bitcoin’s decentralised nature is one of its many appealing characteristics. Because it is decentralised and not controlled by a single government, it isn’t subject to the impulses of a central bank or political party.
Likewise, whereas central banks can print more traditional currencies over time, which drives inflation and reduces the currency’s buying power, there is a cap on the total number of Bitcoins that can ever be mined. Bitcoin was designed to be a currency that holds its value – in other words, it has anti-inflationary properties.
Perhaps the biggest reason why lots of people are interested in investing in Bitcoin is it offers bigger returns than pretty much any other asset. For experienced traders, Bitcoin’s volatility is actually the reason why it’s possible to earn such huge profits – although it goes without saying that successfully buying low and selling high is incredibly difficult.
Something that has really confounded Bitcoin sceptics is the growing appeal of the cryptocurrency as a safe-haven asset. Earlier this year, people flocked to Bitcoin as global stock markets and fiat currencies were hurt by trade tensions and geopolitical forces. Again, the coin’s decentralised nature means it is insulated from political forces.
What’s more, whereas many people around the world don’t have access to traditional investment markets, Bitcoin is available to pretty much anyone. It’s possible to invest either small or large amounts, which opens up investing to those from underdeveloped countries.
Bitcoin’s value is closely linked to how favourably people view the cryptocurrency, which is something that even the most knowledgeable traders find hard to predict. Having said that, many Bitcoin enthusiasts are of the view that its value will inevitably rise in the long term.
Bitcoin’s adoption rate is growing worldwide, with more businesses now accepting it as a form of payment. The cryptocurrency’s use cases are growing all the time, and it’s predicted Bitcoin will be serving a whole host of new functions in the future. This will only serve to reinforce Bitcoin’s value.
Bitcoin’s volatility doesn’t detract from its value, but it does mean investors need to have their wits about them before investing in the digital asset.
Volatility can reap rewards, but it can also result in huge losses. So experience, knowledge, and an appetite for high risk are a must.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.