Will Bitcoin Ever Stop Fluctuating and Gain Stability?

One of the main characteristics of Bitcoin that every investor should be aware of is that it is highly volatile. Despite being the largest cryptocurrency in terms of market cap, Bitcoin’s price keeps fluctuating sharply, sometimes leaving investors in losses.

In November 2021, Bitcoin sold at a record high of just below $70,000. By November 2022, Bitcoin price had dropped to just above $16,000. That is over a 75% drop in barely a year.

But, why is the Bitcoin market so unstable? And will it ever stabilize?

Bitcoin has a Small Market Cap

While Bitcoin boasts the largest market cap among cryptocurrencies. The size of its market is nothing compared to the huge global currency markets. Usually, the smaller market an asset has, the more volatile it will be. Imagine throwing a rock in a small water pool. Now, take the same rock and throw it into the ocean. The rock will have a greater effect in the pool compared to the ocean. Now think of Bitcoin as a small pond that is much more affected by daily transactions (the rock) compared to the fiat money market (the ocean).

Today, Bitcoin’s market cap is 451.7 billion. On the other hand, gold has a market cap of about $12 trillion. Therefore, gold is much more stable compared to Bitcoin.

Consumer Speculations and Confidence

Another way to explain the volatility of Bitcoin is the concept of supply and demand. Bitcoin’s price is determined by the interplay of supply and demand. The more demand there is for Bitcoin, the higher the price people will be willing to pay.

One of the factors affecting Bitcoin demand is consumers’ speculation and confidence in the Bitcoin market. Think about it. How will you react if you see the price of Bitcoin rising? As an investor, you would want to buy Bitcoin so that you can cash on it later when the prices have risen even higher. Chances are, many people will be thinking the same way. Such excitement can take over the market leading to an increase in Bitcoin demand. When the demand increases, the price goes further.   

On the other hand, when the prices start to fall, investors may anticipate a bear market and start selling their Bitcoins before the price falls even further. When mass selling occurs, the supply of bitcoin outbalances the demand leading to a further drop in prices. The effect can be even worse when larger investors move fast to sell their large portfolios.

The Effect of Crypto Wales and Influencers

Sometimes individual people or companies with large Bitcoin portfolios can trigger customer speculations. Whales (wallets that hold a lot of Bitcoins) may move the market when they sell their orders on the books at lower prices, creating the effect of a rock in a pool. In such cases, the market only stabilizes when the Whales withdraw their large sale orders.

Whales can also move the market in the opposite direction by simply inflating the prices of their buy orders. Bidders will be forced to raise their prices. The tactic creates the “fear of missing out”, which drives ordinary investors to buy Bitcoins.

Apart from the Whales, celebrities, influencers, and big investors can also influence the market with their moves or even opinions. For example, Bitcoin prices jumped by 20% within 24 hours on February 4, 2021, following Elon Musk’s announcement that Tesla bought bitcoins worth $1.5 billion.  

Will Bitcoin Prices Ever Stabilize?

Whether Bitcoin will manage to stabilize depends on how it grows liquidity. Bitcoin’s market cap is calculated by multiplying the number of Bitcoins in circulation by the price of each Bitcoin. However, the amount of Bitcoin in circulation is limited to 21 million, and more than 90% of Bitcoins have been mined already. The major influence on Bitcoin’s market cap will be through price change. The maximum supply mechanism is designed to create scarcity, which will drive Bitcoin prices up.

The price movement will become smaller once the prices grow, bringing the market cap to higher levels.

Additionally, as the knowledge about Bitcoin and how it works continues to grow, the market becomes much more predictable. This will shield Bitcoin prices from the effect of speculations.  

 Wrapping Up Volatility is usually common at the early stage of any new market. Bitcoin is still in its earliest stage. Added to the low volatility and the speculative nature of the asset, it is normal for the Bitcoin market to experience such high volatility. Once this stage is over, we may experience a more stable Bitcoin market.