A trip down Bitcoin history will show you a disturbing trend: its price fluctuates randomly. It may be high when you sleep at night only to wake up in the morning to a depreciating coin.
Forbes made a great attempt at giving a comprehensive review of the decline of bitcoin value over the years. The article will provide you with an insight into the fluctuating nature of this digital currency.
Several attempts have been made to unravel the mystery behind this irrational behavior. This article takes a look at some of the underlying factors that may dictate the price of the most valuable cryptocurrency.
Regulation plays a crucial role in bitcoin price. It is quite unfortunate that countries around the world don’t have a consensus idea about the most effective way to handle bitcoin. While some support stiff regulation, some advocate a relaxed approach towards it. When rigid regulations are put in place, the price goes down as an increasing number of investors may pull out their investment out of fear of losing out. On the other hand, when it gets favorable treatment from governments, investors respond positively, leading to price appreciation.
This Telegraph comment says it all:
Prices tend to react quickly to any decisions regarding cryptocurrency regulation. For example, when Japan announced that it was legalizing bitcoin in April 2017, the price hit $1,130, rising nearly 3pc in a day.
But when regulators crackdown this also hits cryptocurrencies hard. A particular culprit has been the Chinese market, mainly because it is so large.
A similar experience was captured by CNBC when bitcoin price dropped by $200 after a new regulatory move by Chinese regulators in September 2017. Bitcoin price fell from $4,584 to $4,350 after China announced a ban on Initial Coin Offerings (ICOs) in the country.
On several occasions, investors have been at the mercy of hackers. These daredevil cybercriminals have made away with millions worth of bitcoin over the years.
Hackers stole 7,000 bitcoin from Binance, one of the most reputable bitcoin exchanges. The initial reaction was fear. Several investors wanted out of the coin. That harmed the currency’s value.
However, an assurance from Binance that their investment was safe yielded a positive result. It increased confidence in the digital currency. The price picked up again.
In essence, when bitcoin is hacked, fear of the unknown usually lead to a drop in price. As more investors lose interest in bitcoin, it depreciates rapidly. More interest translates to price appreciation as well.
Cointelegraph reported the effect of the notoriously famous Mt. Gox hacking in 2014. According to the article,
Experts suggested that the recent price drop of bitcoin to around $6,000 in February 2018 was down to an Mt. Gox trustee ‘panicking and selling $400 million worth of bitcoin.
You can imagine the impact of the hacking on this employee and others. He was forced into panic selling, same ways several other investors reacted to the news. That resulted in a drop in the price of bitcoin.
News and Media
Another factor that significantly affects the bitcoin price is news and media. Over the years, the price drops down in response to negative news and vice versa. For instance, the recent announcement of Facebook Libra had a positive effect on bitcoin.
Forbes’ Billy Bambrough reported,
The bitcoin price has surged over the last few months as interest in payments from the likes of Facebook, other major social media platforms, and some of Silicon Valley’s most valuable companies sparks a fresh wave of crypto mania after the bitcoin price slumped sharply throughout 2018.
This is an apt summary of the influence that news can have on the digital currency.
Supply and Demand
The law of supply and demand also sets in and plays a significant role in determining what happens to bitcoin. It is clear that if a digital currency has a high token supply and there is little demand for it, it will drop in value. However, if more investors are interested in the coin that the available token, the digital currency will experience a surge in price.
Cointelegraph takes a look at the impact of this law on bitcoin. The excerpt from one of its articles says:
This is linked to the scarcity element that drives up prices and is one of the factors that saw the price of bitcoin climb to its highest levels. The supply of bitcoin is capped at 21 million BTC — which is relatively low compared to other tokens — while the demand has soared in recent years.
While this is true, sometimes, though, several factors may trigger a reduction in the demand for this coin, leading to its depreciation. Some of these factors are discussed in this article.
The Fear of Missing Out (FOMO)
A good percentage of investors bought into bitcoin out of the fear of missing out an opportunity to join the bitcoin investor group. This fear is usually pronounced after the digital currency reportedly appreciates or is appreciating. Some feel that if they don’t act swiftly and invest in the coin, they won’t benefit from the appreciation. This usually leads to more demand for the coin. Hence, price appreciation.
“That fear of missing out, or FOMO, can push previously-shy investors over the edge” is how Bloomberg describes the experience in a comprehensive article that discusses bitcoin’s performance on weekends.
How long investors can sustain and act on that fear is another thing. Sometime, it may be a short feeling that doesn’t pass the test of time. Once the initial euphoria dies down, demand reduces. The usual result is another dip in the price of the most popular cryptocurrency.
Since Bitcoin was announced in 2009, events have shown that you should not blame a single factor for bitcoin‘s performance. Instead, several factors contribute in a way or the other to its irrational price appreciation and depreciation.
Only the future will tell how this trend will continue.