Similar to commodity prices, the Bitcoin price can change over time as supply and demand rise and fall.
What is Volatility?
Volatility is the variance in fluctuations from the average price of an asset. Bitcoin has increased more than 50x over the past five years, giving it greater variance from the average price than traditional financial instruments like bonds or stocks. Investments that rise or fall sharply have a high volatility.
Volatility is often used as one of the main indicators of risk.
Why is Bitcoin volatile?
There are many factors that contribute to Bitcoin's volatility. Important reasons are that Bitcoin is still a relatively small and young asset class and that Bitcoin as a new technology, in contrast to gold, bonds and real estate, is not yet fundamentally understood by many investors. Some investors are only slowly beginning to get to grips with Bitcoin. In addition, regulators must first find framework conditions for how Bitcoin fits into our world.
Bitcoin's price is driven by expectations of future value, and the actions taken by investors and politicians today are changing those expectations and, as a result, the price.
The market for Bitcoin is still tiny and immature, which is why there have always been large price fluctuations in the past. The smaller a market, the higher volatility can occur as there are fewer market participants to meet demand.
In mature markets, market participants can use derivatives (special financial products) to hedge against large fluctuations, which is why these usually occur less often and less severely. Compared to stocks or bonds, the market for Bitcoin derivatives is extremely young and the volume traded is negligible.
Bitcoin is also the only asset that can be traded 24/7 365 days a year. In contrast to classic financial instruments, there are no trading interruptions or even complete trading stoppages in the event of a price collapse.
However, Bitcoin's long-term upward trend cannot be overlooked, despite sometimes high fluctuations.